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2017 DIGILAW 564 (KER)

South Travancore Distilleries and Allied Products v. State of Kerala

2017-03-22

A.K.JAYASANKARAN NAMBIAR, A.M.SHAFFIQUE, K.RAMAKRISHNAN

body2017
ORDER : A.K. JAYASANKARAN NAMBIAR, J. 1. The above revision petitions have been posted before us pursuant to a reference order dated 25.5.2016 of a Division Bench, which was of the opinion that the judgment of another Division Bench in M/s. United Spirits Limited v. State of Kerala [judgment dated 22.1.2010 in W.A.No.1225/2007] is factually incorrect, thereby, leading to an erroneous conclusion affecting the operation of law. The circumstances leading to the reference are as follows: 2. STRV No.62/2012 has been preferred by the assessee against an order dated 30.11.2011 of the Kerala Sales Tax Appellate Tribunal, Thiruvananthapuram. The facts stated in the revision petitions would indicate that the petitioner assessee is a registered dealer under the Kerala General Sales Tax Act, 1963 [hereinafter referred to as the ‘KGST Act], engaged in compounding, blending and bottling of foreign liquor. It is the specific case of the petitioner that it does not undertake any distillation process for the manufacture of foreign liquor. For the assessment year 1998-99, the petitioner filed a return under the KGST Act, and the regular assessment was completed in terms of the provisions of the KGST Act on 15.1.2003. The petitioner was assessed on a total turnover of Rs.12,98,53,527.57 and a taxable turnover of Rs.2,03,010/-. It was granted an exemption in respect of the turnover tax payable in respect of sales effected to the Kerala State Beverages (Manufacturing and Marketing) Corporation Limited [KSBC] in an amount of Rs.12,96,50,520.72. Consequent to amendments that were brought about to the Kerala Abkari Act, through the Finance Act, 2003, the assessment completed in respect of the petitioner for the year 1998-99 was re-opened under Section 19 of the KGST Act. The assessment was re-opened, on the contention that, under Section 18(2) of the Kerala Abkari Act, the payment of excise duty by the KSBC was on behalf of the manufacturer, and therefore, the excise duty component of the turnover had to be included in the turnover declared by the petitioner, for the purposes of levy of turnover tax. Relying on the provisions of Section 5(2C) of the KGST Act, the assessment under Section 19 was completed by demanding turnover tax on the excise duty component also. A demand was thereafter raised on the petitioner to an extent of Rs.64,25,126/- representing the tax, and Rs.68,74,885/- representing interest under Section 23(3) for the period from May, 1999 to October, 2003. Relying on the provisions of Section 5(2C) of the KGST Act, the assessment under Section 19 was completed by demanding turnover tax on the excise duty component also. A demand was thereafter raised on the petitioner to an extent of Rs.64,25,126/- representing the tax, and Rs.68,74,885/- representing interest under Section 23(3) for the period from May, 1999 to October, 2003. Aggrieved by the assessment order under Section 19 of the KGST Act, the petitioner preferred an appeal before the First Appellate Authority, inter alia, contending that he was not a manufacturer, but only a person engaged in compounding, blending and bottling of foreign liquor, and therefore, could not have been fastened with a liability for excise duty, or turnover tax on the excise duty component. The appeal before the First Appellate Authority was dismissed, and the levy of turnover tax on the excise duty component confirmed against the petitioner. The First Appellate Authority, however, remanded the issue of interest to the assessing officer, for a fresh consideration. Against the order of the First Appellate Authority, the petitioner preferred an appeal before the Appellate Tribunal, which rejected the appeal, relying on the amendment that was brought about to Section 5(2C) of the KGST Act, with effect from 1.4.1998, and also on the decision of the Supreme Court in State of Kerala and Others v. Maharashtra Distilleries Ltd. and Others, (2005) 11 SCC 11 : 2005 ICO 392. 3. STRV No.63/2012 stems from a rectification order passed in the reassessment under Section 19 of the KGST Act, that was completed against the assessee by order dated 31.10.2003. In the said order, the demand of turnover tax in respect of the excise duty component covered the period from 1.4.1998 to 31.3.1999. Subsequently, based on the decision of the Supreme Court in Maharashtra Distilleries case [supra], the Assessing Authority rectified the order passed, in relation to the petitioner, under Section 19 of the KGST Act, and the demand of turnover tax on the excise duty component was confined to the period from 5.1.1999 to 31.3.1999. The rectified order, to the extent, it demanded turnover tax on the excise duty component, for the period from 5.1.1999 to 31.3.1999, was challenged by the petitioner before the First Appellate Authority, and thereafter before the Appellate Tribunal. As the Appellate Tribunal dismissed the appeal of the petitioner, the petitioner approached this Court through STRV No.63/2012. 4. The rectified order, to the extent, it demanded turnover tax on the excise duty component, for the period from 5.1.1999 to 31.3.1999, was challenged by the petitioner before the First Appellate Authority, and thereafter before the Appellate Tribunal. As the Appellate Tribunal dismissed the appeal of the petitioner, the petitioner approached this Court through STRV No.63/2012. 4. As the orders of the Appellate Tribunal, that are impugned in the Sales Tax Revisions, are based on the decision of the Supreme Court in Maharashtra Distilleries case [supra], it would be apposite to notice the facts in the said case, which would throw light on the issue that was considered by the Supreme Court, and the context in which the judgment was rendered by the Supreme Court. The Supreme Court considered two batches of appeals that were preferred against judgments of the Division Bench of this Court. The first batch of appeals arose out of writ petitions filed in the years 1998-99, which were disposed by a common judgment and order of a Division Bench of this Court dated 27.11.1999 in O.P.No. 23008/1998 and connected cases, whereby, this Court allowed the original petitions filed by the assessee Distilleries, holding inter alia that, under the scheme of the Kerala Abkari Act and Rules, the incidence of excise duty on the manufacture of Indian Made Foreign Liquor [IMFL] was required by law to be borne by the KSBC, to whom, the liquor was sold at a price which did not include the element of excise duty. Consequently, the State of Kerala and its officers were not entitled to levy turnover tax on the assessee Distilleries, by including in their turnover, the excise duty payable on the liquor manufactured and sold by the Distilleries to the KSBC. This Court also declared that Section 2(xxvii) of the KGST Act authorising the levy of turnover tax, on the amounts of excise duty paid by the KSBC, on the assessee Distilleries was unconstitutional and void. This Court also declared that Section 2(xxvii) of the KGST Act authorising the levy of turnover tax, on the amounts of excise duty paid by the KSBC, on the assessee Distilleries was unconstitutional and void. After the judgment of this Court in the first batch of writ petitions, and while the appeals against the said judgment and order were pending before the Supreme Court, on 1.4.2001, the State of Kerala amended Section 5(2C) of the KGST Act, by the Finance Act, 2001, by adding an explanation, which was brought into effect retrospectively from 1.7.1987, and which reads as follows: “Explanation :- For the removal of doubt it is hereby clarified that any distillery in the State which sells liquor manufactured by it within the State to the Kerala State Beverages Corporation shall be liable to pay turnover tax on the turnover of sale of liquor by it to the said Corporation and the turnover for the purpose of this sub-section shall include any duty of excise livable on such liquor at the hands of such manufacturer whether such duty is paid by the manufacturer or by the said Corporation.” Since the Sales Tax Authorities issued notices to the assessee distilleries proposing to provisionally assess the turnover tax payable by the manufacturers from April, 2001 at various rates, the assessee distilleries filed writ petitions challenging the validity of Section 5(2C) of the KGST Act read with Section 3-A of the Kerala Finance Act, 2001, as being unconstitutional, both in its retrospective and prospective operation. The consequential actions initiated against them by the Sales Tax Authorities were also challenged by the assessee distilleries. By a common judgment dated 9.8.2002, in O.P.No.3736/2002 and connected cases, a Division Bench of this Court, while not agreeing in principle with the law laid down in the earlier judgment of the Division Bench of this Court, while disposing of the first batch of writ petitions, took the view that the incidence of excise duty fell squarely on the assessee distilleries, and as such was includable in their total turnover for the purpose of computation of turnover tax under the KGST Act. The Division Bench of this Court, however, felt itself bound by the earlier decision & rendered by this Court, and therefore, following the earlier decision, held that, by adding an explanation to Section 5(2C) of the KGST Act, the constitutional lacuna pointed out in the earlier judgment had not been removed by an appropriate amendment to the Kerala Abkari Act. It was held therefore that, by merely amending the KGST Act, the excise duty element paid by the KSBC could not be added to the turnover of the assessee distillers, since it had been held in the earlier judgment of this Court that excise duty was leviable only on the purchaser, namely, the KSBC. 5. The Supreme Court, after noticing the provisions of the Kerala Abkari Act and Rules, as also the provisions of the KGST Act, found that the levy of excise duty under the Kerala Abkari Act and Rules was not traceable to Entry 51 of List II of the Seventh Schedule to the Constitution but to Entry 8 of List II there under. It was noticed that, as per the provisions of the Kerala Abkari Act, the duty, which was termed as 'excise duty', could be levied either on goods manufactured in the State or imported into the State, and further, the duty in question was also payable by the KSBC. These facts led the Supreme Court to hold that the levy of excise duty, under the Kerala Abkari Act and Rules, was not a duty that was levied on the manufacture of goods but on the goods themselves. It was further found that, the duty was one that was charged as a privilege price by the State Government for parting with its exclusive privilege of wholesale trade in IMFL in favour of the KSBC. It was clarified that, if the price formed part of the consideration payable by the manufacturers, for the supply of IMFL to KSBC, then it could form part of the turnover of the manufacturer but not otherwise. The Supreme Court also noticed that the factual position had changed with effect from 5.1.1999 through an amendment that was brought to the Foreign Liquor Rules, whereby, with effect from the said date, the KSBC could not purchase IMFL from the manufacturers without payment of the excise duty. The Supreme Court also noticed that the factual position had changed with effect from 5.1.1999 through an amendment that was brought to the Foreign Liquor Rules, whereby, with effect from the said date, the KSBC could not purchase IMFL from the manufacturers without payment of the excise duty. The findings of the Supreme Court are to be found in paragraphs 84 to 89 of the judgment, which read as follows: 84. From the above discussions the following conclusions emerge:- 1. Section 17 of the Kerala Abkari Act deals with imposition of duty not necessarily connected with manufacture of liquor and, therefore, the duty levied must in each case be examined before coming to a conclusion as to whether it is in reality a duty of excise. 2. The use of the words “duty of excise” in Section 17 of the Act is not conclusive and it is for the Courts to examine in each case as to whether it is in facta “duty of excise”. 3. In order that a duty may be characterized as “duty of excise” it must be shown that it is a duty on manufacture of goods. If it is unrelated to the manufacture of goods, it may be any other impost permitted by law, but would not qualify as a duty of excise. 4. Section 18A of the Act permits the State of Kerala to grant exclusive or other privilege of manufacture etc. on payment of rentals which includes the privilege of supplying liquor by wholesale or by retail. The annual rental payable under Section 18A may be collected to the exclusion of or in addition to duty or tax livable under Sections 17 and 18 of the Act. 5. That the State of Kerala by amendment of the Act and the relevant Rules created a monopoly in favour of the Kerala State Beverages Corporation. Licenses in Form FL9 and BW1 have been given exclusively to the aforesaid Corporation which has also executed an agreement in Form A undertaking to pay the duty. A monopoly has been created in favour of the aforesaid Corporation in the wholesale trade of IMFL. In view of Rule 11 of the (Storage in Bond) Rules duty is payable on the movement of IMFL from the bonded warehouse of the Beverages Corporation to the FL9 licensed premises. A monopoly has been created in favour of the aforesaid Corporation in the wholesale trade of IMFL. In view of Rule 11 of the (Storage in Bond) Rules duty is payable on the movement of IMFL from the bonded warehouse of the Beverages Corporation to the FL9 licensed premises. It is payable when IMFL is issued from the bonded warehouse of the Corporation. 6. The levy of duty on IMFL issued from a bonded warehouse licensed or established under Section 12 or Section 14 of the Act is referable to the duty levied under Section 17(f) of the Kerala Abkari Act. 7. The Notifications issued by the Government relate both to goods manufactured in the area or imported into the area. 8. The duty levied is on goods and not on manufacture. 85. Taking all these factors into account and having regard to the Scheme of monopoly introduced by the State of Kerala in the year 1984 we must hold that the levy of duty is not a levy in the nature of ‘duty of excise’ but is the privilege price payable by KSBC in consideration of the State parting with its exclusive privilege of wholesale trade in IMFL in favour of the aforesaid Corporation. 86. It was alternatively submitted on behalf of the State that even if it is held that what is levied is privilege price it will still form part of the sale price of the liquor sold by the distillers to the Beverages Corporation and hence part of the taxable turnover for the purpose of levy of turnover tax. The respondents on the other hand contend that by its very nature the privilege price must be paid by the beneficiary and is not capable of being transferred to the manufacturers/distillers from whom the IMFL is purchased for wholesale trade. 87. We are of the view that if the privilege price is a part of the consideration payable by the Corporation to the manufacturers for supply of IMFL to the Corporation it will certainly be a component of the sale price of the liquor sold by the manufacturers to the Beverages Corporation. If it is not so, then the respondents are right in contending that having regard to its very nature, privilege price is a price which the beneficiary, in whose favour the State parts with its privilege, must pay. If it is not so, then the respondents are right in contending that having regard to its very nature, privilege price is a price which the beneficiary, in whose favour the State parts with its privilege, must pay. In this case since the State has parted with its exclusive privilege of wholesale trade in IMFL and that right has been conferred exclusively on the Beverages Corporation, it is the Beverages Corporation which must pay the privilege price in addition to the annual rental payable by it. 88. In view of our above finding, it is not necessary to consider the alternative submission of Mr. Nariman that even if the levy is found to be a duty of excise, its incidence did not fall on the manufacturer or the producer. 89. In view of our finding that the duty imposed is not a duty of excise but represents the privilege price charged by the Government from KSBC as a consideration for parting with its exclusive privilege to sell liquor by wholesale in the State of Kerala, the respondents are not liable to include that duty paid by the Beverages Corporation in their turnover. However, the position changed radically with effect from 5.1.1999. The High Court noticed this fact in paragraph 67 of the judgment, namely - that with effect from January 5,1999 in view of the amendment to Foreign Liquor Rules, the KSBC could not purchase IMFL from the manufacturers/distillers without payment of duty. In view of the amendment, the KSBC had to pay duty before it could lift the stock of IMFL from the manufacturers’ warehouse to its own licensed premises. Thus the KSBC paid to the manufacturers the duty payable in respect of IMFL and consequently the amount of duty paid formed part of the consideration for which the property in goods passed to the KSBC. We have earlier noticed the amendments made to the Foreign Liquor Rules which leave no room for doubt that with effect from 5.1.1999 manufacturers/distillers (respondents herein) were bound to include in their turnover the amount paid to them by the KSBC by way of duty levied under the Abkari Act together with the price of the liquor purchased from them. The learned Judges noticed this fact but granted relief in broad terms as prayed for by the respondents. In our view the High Court fell into an error in doing so. The learned Judges noticed this fact but granted relief in broad terms as prayed for by the respondents. In our view the High Court fell into an error in doing so. It ought to have held that in any event with effect from 5.1.1999 the respondents-manufacturers/distillers were bound to include in their turnover the amount of duty paid to them by the KSBC since that formed part of the consideration for sale of IMFL to the said Corporation. We, therefore, hold that from 5.1.1999, the date with effect from which the KSBC started paying duty to the manufacturers/distillers before lifting the stock of IMFL to its own licensed premises, the amount of duty paid formed part of the consideration paid by the Corporation to the manufacturers and consequently it formed part of the turnover of the manufacturers.” 6. Subsequent to the decision of the Supreme Court in Maharashtra Distilleries case [supra], writ petitions were filed before this Court, by the assessee distilleries, challenging the inclusion of turnover of excise duty, paid by the KSBC, for the liquor lifted by the said Corporation from the assessee’s distilleries, for the purpose of payment of turnover tax under Section 5(2C) of the KGST Act. A Single Bench of this Court, by judgment dated 14.11.2006 in W.P.(C).No. 21230/2005 and connected cases, following the judgment of the Supreme Court in Maharashtra Distilleries case [supra], found that there was no scope for any dispute regarding the assessee’s liability to pay turnover tax from 5.1.1999, by treating the excise duty paid by the KSBC, as part of the turnover of the assessee. It was found that the assessee was bound to pay turnover tax, on the turnover inclusive of excise duty, paid by the KSBC, for the liquor purchased from it, with effect from 5.1.1999. It was held, however, that the amendments that were brought about to Sections 17 and 18 of the Kerala Abkari Act, by Finance Act, 2003, did not have the effect of removing the basis for the declaration by the Supreme Court in the Maharashtra Distilleries case [supra] that the State Government could not include excise duty in the turnover of the assessee Distilleries, in respect of supplies of IMFL, effected to the KSBC, prior to 5.1.1999. It was held that, in view of the declaration by the Supreme Court in Maharashtra Distilleries case [supra], if the State Government wanted to get over the declaration of law by the Supreme Court, it would have to enact a Validation Act for the purposes of removing the basis of the judgment of the Supreme Court. This view of the learned Single Judge was affirmed by a Division Bench in the judgment dated 22.1.2010 in W.A.No.1225/2007 and connected cases. The relevant portion of the judgment of the Division Bench, which dealt with the necessity of a validating Act, for the purposes of removing the basis of the declaration by the Supreme Court in Maharashtra Distilleries case [supra] reads as follows: “18. In so far as the appeal of the State is concerned, the nature of the transaction, including its change from 5.1.1999 having been laid down by the Apex Court in a particular manner in Maharashtra Distilleries (supra), it is beyond the power of the State to visit the situations and assessments governed and covered by that judgment by apparently attempting to take off the effect of that judgment without appropriate retrospective amendments in the Abkari Laws with proper validation of whatever that had been done under that piece of law. It was therefore that the learned Judge took the view that the nature of the transaction between KSBC, the Government and the manufacturers/distillers, having been deliberated upon and laid down by the Apex Court, it is not be open to the State Government to sustain the retroactivity of the amendments. Under such circumstances, the learned Judge, in our view, was justified in taking the view that the retro-activity given to the amendment does not stand. 7. It would be apparent from a reading of the judgment of the Division Bench of this Court, referred above, that the Division Bench found that the amendments that were brought about in Sections 17 and 18 of the Kerala Abkari Act, did not really remove the basis of the declaration by the Supreme Court in Maharashtra Distilleries case [supra], to the effect that the duty that was charged in terms of the said provisions was only a privilege price, by the State, for parting with its exclusive privilege of wholesale trade, in IMFL, in favour of the KSBC. As already noted earlier, the declaration of the Supreme Court was prompted by the findings of the Court, on a perusal of the statutory provisions of the Kerala Abkari Act, as they then stood, that the duty under Sections 17 and 18 could be levied not only on goods manufactured in the State, but also on goods imported into the State. This declaration by the Supreme Court, of the nature of the duty that was levied under Sections 17 and 18 of the Kerala Abkari Act, was not altered by any amendment to the provisions of the Kerala Abkari Act, which had the effect of changing the nature of the duty that was levied under the Act. As a matter of fact, a perusal of the amendments brought in by the Finance Act of 2003, would indicate that the duty levied continued to be on both, goods manufactured in the State as also goods imported into the State. It is apparent therefore that the duty levied continued to be in the nature of a privilege price, charged by the State, for parting with its exclusive privilege of wholesale trade in IMFL, in favour of the KSBC. 8. The Reference Order dated 25.5.2016 proceeds on the basis that the judgment of the Division Bench in M/s. United Spirits Limited [supra] is factually incorrect, in that, it did not notice that the amendments to the Kerala Abkari Act, through the Finance Act of 2003, had already nullified, retrospectively, the precedential impact of Maharashtra Distilleries case [supra]. In other words, the reference order proceeds on the basis that the amendments that were brought in to the Kerala Abkari Act, through Finance Act, 2003, pending final disposal of the issue by the Supreme Court in Maharashtra Distilleries case [supra], had already had the effect of removing the basis of the declaration of the Supreme Court with regard to the law that applied prior to 5.1.1999. This assumption, in the reference order, appears to us to be erroneous, since, as already noted, it is apparent that the amendments brought to the Kerala Abkari Act, through the Finance Act, 2003, did not have the effect of removing the basis of the declaration of law, by the Supreme Court, for the period prior to 5.1.1999 in Maharashtra Distilleries case [supra]. We are of the view that the decision of the Division Bench in M/s. United Spirits Limited [supra] correctly notices the said fact, while affirming the decision of the learned Single Judge in Messrs Kerala Distilleries v. State of Kerala. 9. There is yet another aspect of the matter. As already noticed, the declaration of law by the Supreme Court in Maharashtra Distilleries case [supra], for the period prior to 5.1.1999, worked to the prejudice of the State Government, in that, the State Government was prevented from adding the excise duty component to the turnover of the assessee distilleries, while levying turnover tax for the period prior to 5.1.1999. The facts in the revision petitions before us would also clearly indicate that, pursuant to the judgment of the Supreme Court in Maharashtra Distilleries case [supra], the Sales Tax Department had revised the demand, pursuant to reassessment under Section 19 of the KGST Act, and confined the demand of turnover tax, on the excise duty component, to the period a from 5.1.1999 to 31.3.1999. Thus, in the instant cases, the State Government itself did not pursue a demand for the period prior to 5.1.1999. Further, the revision petitions are preferred at the instance of the assessee, and not the State Government. We find, therefore, that the reference itself was wholly unnecessary since the issue referred pertains to the entitlement of the State Government, to collect turnover tax on the excise duty component, for the period prior to 5.1.1999, & and this is not the issue raised, as indeed it cannot be, in the revision petitions that are preferred, at the instance of the assessee. We answer the reference accordingly, and direct the Registry to post the Sales Tax Revisions, before the Division Bench, for a decision on merits.