Synthetics and Chemicals Ltd. v. State of U. P. — 1973 DIGILAW 145 (ALL)

JUDGMENT R.L. Gulati, J. - The petitioner is limited company engaged in the manufacture of synthetic rubber in its factory at Bareilly in collaboration with M/s Firestone Tire and Rubber Company of U.S.A. The main raw material from which synthetic rubber is prepared is denatured spirit which is purchased from various distilleries and sugar factories arrayed as respondent Nos. 8 to 20. 2. By a notification dated January, 1937 issued by the Governor of United Provinces, sub-rule (2) was added to rule 17 of the U.P. Excise Rules, levying a vend fee of an as eight per bulk gallon on denatured spirit. The amended rule is as under: "17(2). In the case of issues from distillery a vend fee of annas eight per , bulk gallon will be payable in advance before the spirit is issued. This fee will not be charged on denatured spirit in the case of (i) issues to hospitals, dispensaries and other charitable and educational institutions upto a quantity allowed to be issued by the Excise Commissioner, provided the indent is counter-signed by the Collector; and (ii) issues for export cut of the province, provided the export is made under the authority of a permit granted by a responsible officer of the importing province." The vend fee was enhanced from time to time and finally by a notification dated December 1, 1962, it was fixed at 66 n. p. per bulk litre. In 1963 Rule 17(2) was again amended by a notification dated July 30, 1963 published in the U.P. Gazette Extraordinary dated 10th August, 1963. After clause (ii) in sub-rule (2), the following was added as new clause (iii): "(iii) Issues to industry engaged in the manufacture of synthetic rubber on terms and conditions as the State of Government may determine." Thus the industry engaged in the manufacture of synthetic rubber was granted exemption from the payment of vend fee. The petitioner company has enjoyed that exemption until 1972. Acting under Sec. 40(2) (d) of the U.P. Excise Act, 1910, an order called "The U.P. Excise (III Amendment) Rules, 1972" was issued. As a result of this amendment, vend fee on denatured spirit was raised to Rs. The petitioner company has enjoyed that exemption until 1972. Acting under Sec. 40(2) (d) of the U.P. Excise Act, 1910, an order called "The U.P. Excise (III Amendment) Rules, 1972" was issued. As a result of this amendment, vend fee on denatured spirit was raised to Rs. 1.10 per bulk litre and clause (iii) which authorised exemption to industry engaged in the manufacture of synthetic rubber was deleted, so that the petitioner company became liable to vend fee on denatured spirit at the rate of 1.10 per bulk litre with effect from November 3, 1972. The petitioner has challenged this law in this petition under Art. 226 of the Constitution. 3. The imposition of vend fee has been challenged on two grounds: (i) lack of competence, and (ii) estoppel. So far as the challenge based on estoppel is concerned, the same may be disposed of first. 4. It has been slated in the petition that an assurance had been held out by lire State of Uttar Pradesh that no tax of any kind would be levied on denatured spirit consumed by the petitioner company and on the strength of that assurance, the petitioner company had set up the factory at Bareilly. It is further stated that the imposition of this vend fee is a colossal financial burden which the company cannot bear as the cost of production would be so heavy that it would not be able to find market for its products. The petitioner has reproduced in paragraph 6 of the writ petition the minutes of the record of Discussions held on October 24, 1959, at Vidhan Bhawan, Lucknow between the U. P. Government and Sri Tulsidas Kilachand, who floated the petitioner company. These minutes do show that Tulsidas Kilachand was hesitant to undertake the venture of manufacture of synthetic rubber from denatured spirit as it involved an outmoded and a costly process. He also wanted an assurance to be given that no excise duty etc. would be levied on the supply of alcohol. The relevant portion of the minutes is as under: "Sri Tulsidas Kilachand also wanted an assurance that no excise duty etc. would be levied on the supply of alcohol. Sri Kakkar stated that at present no excise duty was charged on the supply of alcohol to Oil Companies for a mixture with petrol. Sri Tulsidas Kilachand was assured that no duty etc. would be levied on the supply of alcohol. Sri Kakkar stated that at present no excise duty was charged on the supply of alcohol to Oil Companies for a mixture with petrol. Sri Tulsidas Kilachand was assured that no duty etc. would be levied on the supplies to the synthetic rubber factory. But obviously no commitment of permanent nature could be made." 5. The last sentence in the extract from the minutes makes it clear that although the Government agreed to grant exemption to the petitioner company from the Excise Duty etc. but a permanent commitment was not made, so that the Government was free to withdraw the concession at any time in future. In these circumstances the plea of estoppel is absolutely futile. 6. From a reading of the writ petition it appears that the legislative competence of the State was challenged with reference to Entries in Lists II and III of the Seventh Schedule of the Constitution. But at the time of arguments the learned counsel conceded that an attack on the legislative competence could not be maintained on the basis of the Entries in the Constitution, as vend fee had been imposed in 1937 prior to the coming into force of the Constitution. He, however, argued that the position under the Government of India Act, 1935, which was in force at the material time, was not different in as much as even under the Government of India Act the levy of vend fee was unauthorised and unconstitutional; and as such was not saved by Art. 277 of the Constitution. 7. A perusal of List II of the Seventh Schedule of the Government of India Act, 1935, which is the Provincial Legislative List, shows that under Entry No 40 duties of excise could be levied on `alcoholic liquors for human consumption.' Denatured spirit is admittedly not fit for human consumption. As such no Excise Duty could be levied on denatured spirit by the State Legislature or the State Government. Oil the other hand. Entry 45 of List of I the aforesaid Seventh Schedule authorises the Centre to levy duties of excise on tobacco and other goods manufactured or produced in India except: (a) alcoholic liquors for human consumption. As such no Excise Duty could be levied on denatured spirit by the State Legislature or the State Government. Oil the other hand. Entry 45 of List of I the aforesaid Seventh Schedule authorises the Centre to levy duties of excise on tobacco and other goods manufactured or produced in India except: (a) alcoholic liquors for human consumption. A reading of the two Entries together shows that the Centre is authorised to levy Excise Duty on alcoholic liquors not meant for human consumption, while the State is authorised to levy Excise Duty on alcoholic liquors meant for human consumption. Thus the impugned law could not be justified as an Excise Duty. 8. The levy in question is not sought to be sustained as a tax for none of the Entries in List II or List III authorises the State Legislature to levy a tax on alcoholic liquors. 9. The only other Entry upon which reliance could be, and has been placed on behalf of the State is Entry 31 in List II which reads: - "31. Intoxicating liquors and narcotic drugs, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors, opium and other narcotic drugs....... " This Entry corresponds to Entry 8 of List II of the State List in the Constitution, and confers upon the State the power to regulate the production, manufacture, possession, transport and purchase and sale of intoxicating liquors. No doubt, the power of regulation is complete but as has been pointed out by us in Sheo Pat Rai v. State of Uttar Pradesh, 1972 ALJ 1000, the power of regulation does not carry with it the power of taxation. Thus the impugned fee cannot be justified under Entry 31. 10. It may be mentioned that we have assumed that expression `intoxicating liquor' occurring in Entry 31 would cover denatured spirit also. It was argued on behalf of the petitioner I that denatured spirit would not come within the expression `intoxicating liquor', because "intoxicating liquor" is only that liquor which is fit for human consumption. A contrary view has been taken by the Gujrat High Court in Chandulal Jethalal Jyaswal v. State of Gujrat, AIR 1964 Guj. 59 relying upon a decision of the Supreme Court in State of Bombay v. P. N. Balsara, AIR 1951 S.C. 318 . A contrary view has been taken by the Gujrat High Court in Chandulal Jethalal Jyaswal v. State of Gujrat, AIR 1964 Guj. 59 relying upon a decision of the Supreme Court in State of Bombay v. P. N. Balsara, AIR 1951 S.C. 318 . Nothing really would turn upon this point because even if denatured spirit can be said to be an intoxicating liquor for the purposes of Art. 31, the impugned levy cannot be justified under that Entry. 11. The next question is as to whether the impugned levy can be justified as a fee. A fee must be for services rendered. In other words, a fee must be based upon the principle of quid pro suo. The petitioner has stated that he is already paying to the State Government Rs. 7.50 per kilo litre by way of administrative charges and the present levy is not backed by any service rendered. In the counter-affidavit, it is admitted that administrative 1 charges at the rate of Rs. 7.50 per kilo litre are being recovered from the petitioner to meet the various administrative expenses incurred for supplying spirit to the petitioner. It has further been stated that the State Government has to maintain a large staff at the factories where the denatured spirit is manufactured and in the petitioner's premises to keep a track of the huge quantities of denatured spirit bought by it and Excise staff is also posted at the transit points for checking leakage of revenue etc. 12. We have already dealt with a similar argument raised in the case of Sheo Pat Rai where we have held that a fee must be in consideration of services rendered and it should, on the face of it, be correlated to the expenses incurred by the State in rendering the services and further that the expenses incurred by the State in maintaining staff to check evasion of tax etc. cannot be taken into consideration. Actually no serious attempt has been made by the State to show that the impugned levy is for any services rendered. In fact, the argument was that no services need be rendered to justify the levy of the present nature. cannot be taken into consideration. Actually no serious attempt has been made by the State to show that the impugned levy is for any services rendered. In fact, the argument was that no services need be rendered to justify the levy of the present nature. However, the learned Chief Standing Counsel frankly conceded that the case of the State was the same as was put forward on its behalf in the case of Sheo Pat Rai and he could not add anything to what had been said in that case. In fact, he conceded that the points raised in this case are identical to the points raised in the case of Sheo Pat Rai and are completely covered by the decision in that case. 13. For the reasons stated in that judgment, we repel the contentions of the State and allow this petition and by a writ of mandamus direct the respondents not to recover from the petitioner any vend fee on denatured spirit consumed in its factory in pursuance of Notification No. 8228-E/XIII-339 (i)/69 dated November 3, 1972, published in the U. P. Extraordinary Gazette, Hindi, dated October 3, 1972, copy whereof has been annexed to the writ petition as Annexure `IV'. 14. The petitioner is entitled to the cost.