TaxTMI 
TaxTMI 
2017 (6) TMI 1333
X X X X Extracts X X X X
X X X X Extracts X X X X
....on No.13222/2016 has been preferred by the petitioner - M/s. Nagindas Hiralal Bhayani claiming to be the wholesale dealer of Denatured Spirit. Special Civil Application No.13642/2016 has been preferred by one ACCRA PAC India Pvt. Ltd. claiming to be possessing the license to store alcohol and manufacture the products dutiable under the Medicinal and Toilet Preparations (Excise Duties) Act, 1955 and who uses the Denatured Ethanol Alcohol (non­potable Alcohol or industrial alcohol) in the manufacture of the final products. [3.0] In all these petitions under Article 226 of the Constitution of India, the respective petitioners have challenged Rule 52 of the Gujarat Bombay Denatured Spirit Rules, 1959 (hereinafter referred to as "Rules, 1959") insofar as it purports to impose an import fee of Rs. 3 per liter in case of import of Denatured Ethanol. The respective petitioners have also challenged the consequential demand made by the respondents towards such import fee from a retrospective date. [4.0] For the sake of convenience, Special Civil Application No.16304/2013 preferred by the Bharat Petroleum Corporation Limited is treated as a lead matter and for the sake of convenience, f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n into consideration as the matter was sub­judice. It is the case on behalf of the petitioner that accordingly, the procurement of Ethanol was obtained from Maharashtra based suppliers with Nil import and export fee basis and accordingly the said Ethanol was supplied to various Gujarat based locations on net delivery basis. It is the case on behalf of the petitioner that as the said Ethanol was procured at Nil import and export fee basis, the retail selling price of petrol was fixed for the State of Gujarat which did not include the element of import and export fee as the same was not demanded from the petitioner. It is further case on behalf of the petitioner that as a corollary, import / export fee not being considered in the retail selling price of petrol in the State of Gujarat was not recovered from the customers through the retail selling price structure of petrol in the State of Gujarat. It is the case on behalf of the petitioner that as per the procedure followed by the Prohibition Department, import passes were issued by the said Department without levying the import fee and all the oil companies including the petitioner were permitted by the Department to uplift Ethan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Shri Bhatt, learned Senior Advocate has vehemently submitted that the Denatured Spirit cannot be renatured. It is submitted that Denatured itself means subjected to a process prescribed for the purpose of rendering unfit for human consumption. It is submitted that Denatured spirit is ethanol to which denaturants are added to make it poisonous, bad tasting, foul smelling or nauseating, to discourage recreational consumption. It is submitted that Pyridine, methanol or copper sulphate can be added to make denatured ethanol poisonous and denatonium can be added to make it bitter. It is submitted that Ethanol is mixed with other chemical to form an undrinkable solution. It is submitted that once the rectified spirit is denatured, the same cannot be renatured again so as to divert the same for potable use. It is submitted that the denaturant added in the same are not separable by any means. Therefore, once the rectified spirit is denatured, it cannot be re­natured and cannot be used for human consumption. It is submitted that therefore the contention on behalf of the State that denatured spirit can be renatured is not true and is baseless. In support of his above submissions, Shri Bh....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g on behalf of the petitioner that Entry 66 of List II refers to fees in respect of any of the matters in the State List and not any other matters and therefore the matters which do not fall in the said List do not allow the State to recover any fees. It is submitted that the State cannot impose fees in respect of item which is not intoxicating liquor fit for human consumption and therefore question of recovering any import fee on absolute denatured spirit or ethanol by the State Government does not survive. [7.6] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that Entry 33 of List III refers to trade and commerce in and the production, supply and distribution of products of any industry where the control of such industry by the Unit is declared by the Parliament by law to be expedient. It is submitted that State cannot claim that under Entry 33 of List III, it can regulate industrial alcohol as a product of scheduled industry. It is submitted that therefore the State's contention that levy of tax on industrial alcohol is competent under Entry 33 of List III of Schedule VII has to be rejected as the same has been specifically n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....use the denaturants such as denatonium is often added to give the substance an extremely bitter flavour. It is further submitted therefore, no supervision as such is required for checking if denatured spirit is renatured in any case. [7.10] It is further submitted by Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner that assuming without admitting that the denatured spirit may by whatever process be renatured, cannot be subject to levy tax in the garb of fee by the State Government, there has to be a direct co­relation between services rendered by the State to the petitioner and that too for the limited purpose of ensuring that denatured spirit is not converted as potable alcohol. It is submitted that details of expenses given by the State in para 17 of the affidavit in reply has no direct co­relation with such services. It is submitted that instead, the alleged expenses may be towards the State's aim under Article 47 of Constitution of India, which is not permissible since in that event, it tantamounts to tax and not fee. In support of his above submissions, Shri Bhatt, learned Senior Advocate appearing on behalf of the petitioner has heavily relie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ontention has been raised that the imposition of import fee on denatured ethanol being imported from the other States was to safeguard the interest of Distilleries working in the State of Gujarat in consonance with the Directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is submitted that thereafter a further affidavit is filed by the State in the said Special Civil Application and an affidavit in reply is also filed in the present petitions. It is submitted that in the further affidavits / affidavit in reply, it has been stated that import fee was levied with a view to safeguard the prohibition policy in the State of Gujarat. It is submitted that therefore the stand taken by the State Government in both the affidavits filed in Special Civil Application No.13046/2012 is contradictory and no clarification has been given in the further affidavit filed in Special Civil Application No.13046/2012. Making above submissions and relying upon above decisions, it is requested to allow the present petitions and set aside the impugned levy of fees on import of denatured ethanol. [8.0] Shri R.S. Sanjanwala, learned Senior Advocate appearing on ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d (u) of the Prohibition Act, the State Government cannot charge the fees, as it talks of excise duties and makes it clear that excise duty and countervailing duty, as the case may be, at such rates or the rates as the State Government shall direct, may be imposed on alcoholic liquor for human consumption and any intoxicating drug or hemp. It is submitted that since the denatured absolute alcohol is not fit for human consumption, there is no question of levy of any duty by the State. [8.4] It is further submitted by Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner that even Rule 143(2)(b) does not empower the State to make Rules in order to regulate the import / export, etc. of any intoxicant, Denatured Spirit preparation, etc. It is submitted that therefore, the decision of this Court relied upon by the State in the case of Gujarat Spirit Dealers Association vs. State of Gujarat in Special Civil Application No.1377/2000 decided on 14.06.2000 shall not be applicable to the facts of the case on hand more particularly against which the appeal is pending before this Court. It is submitted that even otherwise in the said decision the Notification dated 25.10.2004....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ate to collect fee in respect of the expenses incurred in its Excise Department, except those bearing reasonable nexus with the administrative steps taken to ensure that there is no mis­utilisation or diversion of industrial alcohol for the purpose of producing potable alcohol. [8.7] It is further submitted by Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner that the State Government has not undertaken any supervisory activity which would constitute quid pro quo for the imposition of the import fees at Rs. 3 per liter on import of absolute denatured alcohol under Rule 52 of the Rules, 1959. It is submitted that any expenses incurred on such supervisory or administrative activity has perforce already been recovered or reimbursed from fees on account of issuance of license, storage or importation of ethanol alcohol and supervision thereof. It is submitted that as held by the Hon'ble Supreme Court in the case of K.C.P. Limited vs. Government of Andhra Pradesh & Ors. reported in 2015 (8) Scale 681, a tax is levied as a part of common exaction, whereas the fee is paid towards the services rendered. [8.8] It is further submitted by Shri Sanjanwala, learned Sen....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nor's name, destination and quantity and not beyond these. It is further submitted that Methyl Alcohol is a poisonous substance, obviously its leakage or pilferage can cause a horrible tragedy and the Government has still not framed any such rules. It is submitted that behind every such hooch tragedy that has happened in the State of Gujarat from 1977 to till date, the cause is found to be the usage of Methyl Alcohol. Therefore, it was incumbent upon the State Government to frame strict rules with regard to transportation, possession and use of Methyl Alcohol. It is further submitted by Shri Sanjanwala, learned Senior Advocate appearing on behalf of the petitioner that because of above, Methyl Alcohol has been removed from the list of approved denaturants by the Prohibition and Excise Department of State of Gujarat. Therefore, Denatured Absolute Alcohol or Ethanol has no connection with hooch tragedies in Gujarat and the attempt of the State Government to justify levy on that count fails. [8.10] Shri Sanjanwala, learned Counsel appearing on behalf of the petitioner has heavily relied upon the following decisions of various High Courts - Punjab & Haryana High Court, Jharkhand Hig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e of Gujarat, a meeting was convened to discuss the difficulties of the Distilleries working in the State of Gujarat. It is submitted that thereafter, after careful consideration, the State Government has imposed the import fee of Rs. 3 per liter by way of amending Rule 52 of the Rules, 1959 by Notification dated 25.10.2004. [9.3] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State and so stated in the first affidavit in reply dated 24.12.2012, the State Government has imposed the import duty on ethanol in safeguarding the wider interest of Distilleries working in the State of Gujarat in consonance with the Directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is submitted that in view of the prohibition law in the State, the State is restricting the production, use and sale of liquor in the State of Gujarat. [9.4] Now, so far as the submission on behalf of the petitioners that once the rectified spirit is denatured, it will become unsafe for use of human being by adding the chemicals and it is not possible to renatured the same again, it is submitted that the same is a chemical process....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d that by chance if, methanol is mixed in the Denatured spirit, Lattha Tragedy may occur. It is submitted that therefore, to give the effect towards the constitutional duty imposed on the State under Article 47 of the Constitution of India, imposition of such fee on import of ethanol is justifiable. [9.7] Now, so far as the submission on behalf of the petitioners that the State has no power to levy the import fee on "Denatured Ethanol" considering the fact that Union Government has amended Act, 1951 by the 1956 Amendment which includes the item No.26 to Schedule I and therefore, the State has no power to levy tax is concerned, it is submitted that the State has rightly levied the import duty / fees on the "Denatured Ethanol" in a wider perspective to protect and safeguard the interest of the industries working in the State where other States are charging / levying the import duty on "Ethanol" and therefore, it will be unsafe for the industries working in the State to run their business. [9.8] It is further submitted by Shri Trivedi, learned Advocate General appearing on behalf of the State that the Notification dated 25.10.2004 has been issued in exercise of powers conferred by C....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ide the State is absolutely just and proper. Making above submissions it is requested to dismiss the present petitions. [10.0] Heard learned Counsel appearing on behalf of respective parties at length. At the outset it is required to be noted that by way of these petitions under Article 226 of the Constitution of India the respective petitioners have challenged the validity of Rule 52 of the Rules, 1959 insofar as it levies the import fees at the rate of Rs. 3 per liter on imported Denatured absolute alcohol and Special Denatured Spirit. The petitioners have also challenged the circular dated 28.07.2010 issued by the State Government by which it is directed that on payment of import fees at Rs. 3 per liter only, on import fee of Denatured Ethanol (absolute alcohol), the pass be issued. [10.1] It is the case on behalf of the petitioners that once the spirit is Denatured after it being subjected to a process, the Denatured Spirit is Ethanol and therefore, the same is rendered unfit for human consumption and the same cannot be renatured again so as to divert the same again for potable use and the same is thereafter used only for industrial purpose, the State has no legislative comp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d in the present petitions can be said to be beyond the legislative competence of the State. Even in the case of Synthetics and Chemicals Limited (Supra), the Hon'ble Supreme Court has observed that the State may lay down regulations to ensure that non­potable alcohol is not diverted and misused as a substitute for a potable alcohol. [10.2] Now, so far as the reliance placed upon the decision of the Hon'ble Supreme Court in the case of TVL South Indian Sugar Mills Association and Ors. (Supra) relied upon by the learned Counsel appearing on behalf of the petitioners is concerned, on considering the said decision and challenge to the levy of fees is concerned, at the outset it is required to be noted that in the said case it was found that administrative fee / service charge was levied to regulate the production of industrial alcohol by the State Government. Even in the said decision it is observed that so long as the expenses incurred by the State Government in ensuring that the industrial alcohol is not used as potable alcohol, the recovery thereof shall be permissible. However, on facts it was found that the fee was levied for recovery of the administrative or service charges....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tion, he says.) Take a case where two industries 'A' and 'B' come forward with proposals to manufacture rectified spirit; 'A' says that it proposes to manufacture rectified spirit and then denature it immediately and sell it as industrial alcohol while 'B' says that it will manufacture rectified spirit and utilise it entirely for obtaining country liquor [arrack or by whatever other name, it may be called] or for manufacturing I.M.F.Ls. from out of it or to supply it to others for the said purpose. According to Synthetics, 'A' is under the exclusive control of the Union and the only powers of the Stale are those as are enumerated in Para 86 quoted above. But what about 'B'? The rectified spirit manufactured by it is avowedly meant only for potable purposes. Can it yet be called "industrial alcoho"? Can it still be said that the State concerned has no power or authority to control and regulate industry 'B' and that the Union alone will control and regulate it until the potable liquors are manufactured? The Union is certainly not interested in or concerned with manufacture or process of manufacture of country liquor or I.M.F.Ls.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....f the States in the case of such an industry is only to see and ensure that rectified spirit, whether in the course of its manufacture or after its manufacture, it (is?) not diverted or misused for potable purposes. They can make necessary regulations requiring the industry to submit periodical statements of raw material and the finished product [rectified spirit] and are entitled to verify their correctness. For this purpose, the States will also be entitled to post their staff in the distilleries and levy reasonable regulatory fees to defray the cost of such staff, as held by this Court in Shri Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd. v. State of Gujarat, (1992) 1 SCR 391 : (1992 AIR SCW 554) and Gujchem Distelleries India Ltd. v. State of Gujarat, (1992) 1 SCR 675 : (1992 AIR SCW 1206). (2) So far as industries engaged in the manufacture of rectified spirit exclusively for the purpose of obtaining or manufacturing potable liquors ­ or supplying the same to the State Government or its nominees for the said purpose are concerned, they shall be under the total and exclusive control of the States in all respects and at all stages including the establishment of the di....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., necessary ­ that the Union Government makes necessary rules/regulations under the I.D.R. Act directing that no rectified spirit shall be supplied to industries except after denaturing it save those few industries [other than those industries which are engaged in obtaining or manufacturing potable liquors] where denatured spirit cannot be used for manufacturing purposes. (6) So far as rectified spirit meant for being supplied to or utilised for potable purposes is concerned, it shall be under the exclusive control of the States from the moment it is cleared/ removed for that purpose from the distillery ­ apart from other powers referred to above. (7) The power to permit the establishment of any industry engaged in the manufacture of potable liquors including I.M.F.Ls., beer, country liquor and other intoxicating drinks is exclusively vested in the States. The power to prohibit and/or regulate the manufacture, production, sale, transport or consumption of such intoxicating liquors is equally that of the States, as held in McDowell (1996 AIR SCW 1679)." Considering the aforesaid facts and circumstances more particularly considering the pith and substance of the levy of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ter price than producers of other products within their own State. It is thus clearly, in reality, a tax." [11.2] In the case of Gupta Modern Breweries (Supra), in para 33, the Hon'ble Supreme Court has observed and held as under: "33. We have already noted that the plea of the respondents is that it was rendering service by deputing excise staff not only for the purpose of ensuring that the denaturing of spirit is done properly by the manufacturer but also for the purpose of specifically seeing that the de­natured spirit does not go out of the hands, either of the distillery owner or a retail seller or any licensee or permit holder contrary to law. It is, therefore, clear that there was no corelationship between the expenses incurred by the Government and the fee sought to be raised under Rule 17. In other words, there is no quid pro quo between the fee charged and the services rendered. A Constitution Bench of this Court in the case of The Commissioner, Hindu Religious Endowments, Madras vs. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, (1954) SCR 1005 (at 1040, 1041 & 1044) held that a fee must be for a quid pro quo :­ "..As the object of a tax is not to confe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....strial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery "denatured spirit, of course, is wholly and exclusively industrial alcohol". 43. Besides, the fee is required to be justified with reference to the cost of such regulation. The industry is already paying a fee under Rule 2 for such regulation. Indeed the justification for levying the fee under Rule 3(a) is the identical justification given by the State for levying the fee under Rule 2. Presumably, a full complement of Excise Officers and staff are appointed by the State in the Excise Department to carry out their duties under the Act to oversee, control and keep duty on the various kinds of intoxicants under the Act. Having regard to the decision in Vam Organics I, we must also assume that apart from the normal strength, additional officers and staff were appointed to regulate the denaturation of the industrial alcohol. There is nothing to show that there has been any deployment of any additional staff to over­see the possibility of renaturation of the denatured spirit. 44. The question is (to borrow the language is Synthetics) whether in the garb of regu....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of supervising the manufacturing process or any assistance rendered to the manufacturers can­ not be recovered from the consumers like the appellant. Further under rule 9 of the Board' rules, the actual cost of supervision of the manufacturing process by the Excise Department is required to be home by the manufacturer. There cannot be a double levy in that regard. 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 whole­sale dealer, retail dealer or other manufacturers also requires close and effective supervision because of the risk of the denatured spirit being converted into potable liquor and thus evading heavy duy. Assuming this conclusion to be correct, by doing so, the State is rendering no service to the consumer. It is merely protecting its own rights. Further in this case, the State which was in a position to place material before the Court to show what services had been rendered by it to the appellant and other similar licensees, the costs or at any rate the probable costs that can be said to have been incurred for rendering those services and the amount realised as f....
X X X X Extracts X X X X
X X X X Extracts X X X X
....behalf of the State and according to the State the import fee on Ethanol is imposed to safeguard the business interest of the Distelleries working in the State of Gujarat. It is also the case on behalf of the State that the State Government has imposed the import duty on Ethanol in safeguarding the wider interest of the policy of prohibition in the State of Gujarat, which is in consonance with the directive principles of the State Policy enumerated under Article 47 of the Constitution of India. It is the specific case on behalf of the State so stated in one of the affidavit in reply that the State Government has not imposed the levy of tax on Ethanol for the purpose of administrative expenses, but it has been levied for the protection of the "Distellery Industries" working in the State of Gujarat considering the fact that the oil companies may purchase Ethanol from Distelleries working in the State and to protect their deterrent financial conditions. In the further affidavit dated 27.12.2016 filed on behalf of the State it is stated that the import fee in the present case is of regulatory as well as compensatory nature. It is further stated that the total amount of import fee which....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... of spirit is done properly by the manufacturer but also for the purpose of specifically seeing that the de­natured spirit does not go out of the hands, either of the distillery owner or a retail seller or any licensee or permit holder contrary to law and on the aforesaid the levy of license fee was sought to be justified. The Hon'ble Supreme Court held such a Rule 17 to be ultra vires and/or illegal by observing that there was no corelationship between the expenses incurred by the Government and the fee sought to be raised under Rule 17 as there is no quid pro quo between the fee charged and the services rendered. [12.4] Even in the case of Synthetics and Chemicals Ltd. (Supra), it is observed by the Hon'ble Supreme Court that in case the State is rendering any service, as distinct from its claim of so called grant of privilege, it may charge fees based on quid pro quo. In the said decision in para 88 also the Hon'ble Supreme Court has observed while holding the imposition of fees on industrial alcohol in the said case as invalid, it is made clear by the Hon'ble Supreme Court that the same will not affect any impost so far as potable alcohol as commonly understood is concerne....