Holding

The issue price is an indivisible sum; its excise‑duty component cannot be separated, and the amount payable for short‑drawn liquor is part of the price for the exclusive privilege, not excise duty, so the State's demand is valid.

Summary

The State of Andhra Pradesh sought recovery of the excise‑duty component of the issue price for arrack that excise contractors failed to lift against their minimum guaranteed quantity. The contractors argued that excise duty, being a component of the issue price, could be severed and should not be payable on unlifted liquor. The Supreme Court held that once the issue price is fixed, its components lose their individual character and cannot be separated; the amount payable for short‑drawn liquor is part of the price for the exclusive privilege to sell liquor, not a levy of excise duty. The Court overruled the High Court’s decision in Atluri Brahmanandam and affirmed the validity of the 1984 amendment and the State’s demand. Consequently, the State’s appeals were allowed and the special leave petitions dismissed.

Issues considered

The nature of the 'issue price' and whether its components, such as excise duty, can be severed for short‑drawn liquor.
Whether the State may levy excise duty on unlifted (undrawn) liquor under the Andhra Pradesh Excise Act, 1968.
The validity of the Andhra Pradesh Excise (Amendment) Act, 1984 and its validation clause for earlier demands.
The correct interpretation of Sections 17 and 23 of the Excise Act in relation to the grant of lease/licence and consideration payable.
The correctness of the High Court’s judgment in Atluri Brahmanandam v. Tahsildar of Gannavaram.

Legislation cited

Andhra Pradesh (Arrack, Retail Vend Special Conditions of Licences) Rules, 1969s. 15, s. .7, s. II
Andhra Pradesh Excise Act, 1968s. 17, s. 21, s. 2(10), s. 22, s. 23
Andhra Pradesh Excise (Amendment) Act, 1984s. 2, s. 3, s. 4
Andhra Pradesh (Lease of Right to Sell Liquor in Retail) Rules, 1969s. 16, s. 18, s. 22, s. .2(ix), s. 3
Constitution of Indias. Entry 51, List II

Subjects

excise dutyissue priceleaselicenceminimum guaranteed quantityexcise amendmentseverabilityprivilege pricevalidation clausestate taxation

Judgment

STATE OF ANDHRA PRADESH
A
v.
Y. PRABHAKARA REDDY

MARCH 4, 1987.

[0. CHINNAPPA REDDY AND M.M. DUTT, JJ.] B

Andhra Pradesh Excise Act, 1968: ss.2(10), 17, 21-23/Andhra
( Pradesh (Arrack, Retail Vend Special Conditions of Licences) Rules,
\ 1969: ".7, II & 15/Andhra Pradesh (Lease of Right to Sell Liquor in
Retail) Rules 1969: ".2(ix), 3, 16, 18 & 22/Andhra Pradesh Excise
... ,-··- (Amendment) Act, 1984--Minimum guaranteed quantity of a"ack C
short drawn-Contractor whether entitled to deduct from issue price
excise duty component-Issue price-Connotation of.

-J. Section 17 of the Andbra Pradesh Excise Act 1968, as it stood at
the relevant time, provided for the grant of lease for the manufacture or
sale of an intoxicant. It also provided that a lease shall not take effect D
until a licence under the Act was also issued. Section 23 provided that
the sum accepted in consideration for the grant of any lease under s.17
was to be the excise duty payable in respect of that excisable article-

Rule 3 of the Andbra Pradesh (Lease of Right to Sell Liquor in
;., Retail) Rules, 1969 prescribes that every lease of right to sell liquor in E
retail shall be granted by auction. Rule 7 of the Andbra Pradesh
(Arrack Retail Vend Special Conditions of Licences) Rules, 1969 re-
quires the licences to purchase arrack from the distillery, warehouse or
depot allotted by the Government and to pay 'issue price' as notified.
Rule 15 provides for the purchase of a specified minimum guaranteed
~ quantity of arrack every month and for the adjustment of the issue F
"" price in case of any short-fall in the purchase of the minimum
+ guaranteed quantity ofliquor.

A question arose as to whether under the Excise-Law prevailing in
the State, the Government was entitled to claim from the excise con-
tractors, wbo failed to lift-the minimum guaranteed quantity of liquor, G
the amount said to represent the excise duty component in the issue
price of liquor relating to such unlifted quantity of liquor.

A Full Bench of three Judges of the High Court in V. Narasimha
Rao v. Superintendent of Excise, (AIR 1974 AP 157) held In favour of
the Government_ It took the view that three items, namely, duty, cost H

513

•
514 SUPREME COURT REPORTS [1987] 2 s.c. R.

A and sales tax constituted the issue price. Thi~ view, however, was over·
ruled by the Full Bench of Five Judges of the same High Court In Atluri
Brahmanandam v. Tahsildar of Gannavaram, (AIR 1977 AP 196) whe-
rein it was held !hat the Government could not do so. It treated the
excise duty as a severable element of issue price. That judgment was
assailed in the appeals and petitions filed by the Government.
B
To nullify the effect of that judgment and to validate the demands
raised by the Government the State Legislature enacted the Andbra
Pradesh Excise (Amendment) Act X of 1984. The amended s.17 pro·
vides for grant of lease or licence for exclusive privilege of manufacture,
supply by wholesale or sale of any liquor or other intoxicants. The new
C s.23 empower~ the competent officer to accept payment of a sum in
. --.; -
consideration of the grant of lease or licence or both for the exclusive
privilege in respect of the liquor or any other intoxicant under s.17.
Section 4 of the Amending Act, provides for the validation of earlier
demands made in respect of issue price of short drawn minimum
guaranteed quantity of liquor. Demands raised pursuant to the Amend·
D ing Act were upheld by the High Court by a later judgm~nt.

The aggrieved excise contractors filed appeals to this court. Some
of the contractors who bad originally succeeded because of the decision
of Five Judges Bench and were again called upon to make good the
deficit after the Amending Act was passed, having failed iu the High
E Court filed special leave petitions to this Court.

It was contended for the aggrieved contractors that what was
sought to be recovered from them was excise duty on unlifted quantity
of liquor which was not authorised by the provisions of the Act, as the
excise duty being a part of the issue price it could onl:' :elate to liquor
F drawn by them and not pertain to undrawn liquor, that without amend-
ing ss.21 and 22 of the Excise Act the amendment of s.23 affected by the
Legislature led nowhere towards achieving the result aimed at by the
Legislature and that the Legislature could not validate the demands
earlier made and struck down hy the Courts, merely by enacting that
the demands were to be deemed to be valid without removing the vices
G and the defects.

Disposing of the appeals and the special leave petitions, the Court,

HELD: 1.1 Once 'issue price' is .determined its components,
such as excise duty, cost price, transport charges etc. cease to retain
H their individual character. They cannot then be severed from the issue

•
I

STATE OF ANDHRA PRADESH v. Y.P. REDDY 515

price and dealt with separately. The Five Judges Bench of the High
Court was, therefore, wrong in holding that excise duty was a severable A
element of issue price. [526H; 527A-B]

1.2 Issue price is the sum total of whatever has gone into the price
of liquor at the time it is issued and it is a single pre-determined definite
sum per bulk litre and not the total of separate sums representing to B
many specified components. The 'issue price' is that which is notified as
issued price and not its components, if any. These components which
have come together to become 'issue price' are rendered incapable of
.... -- being separated again. Excise duty loses its identity, as it were, and
becomes an inseparable part of 'issue price'. [525H; 526A]

A lessee-licensee, therefore, was not entitled to claim deduction C
from the issue price payable by him in respect of short drawn quantity
of arrack the amount attributable to the excise duty. [528F]

V. Narasimha Rao v. Superintendent of Excise, AIR 1974 AP 157,
distinguished. D

Atluri Brahamanandam v. Tahsi/dar of Gannavaram, AIR 1977
AP 196, overruled.

2.1 The issue price is no more and no less than the price which the
contractor agrees to pay for the grant of the privilege to sell liquor, E
drawn or undrawn. The minumum guaranteed quantity of liquor as
well as the issue price are both fixed well in advance of the auction in
regard to each shop and it is with full knowlege of the issue price and
the minimum guaranteed quantity that every bidder participates in the
auction. [527D; 526C-D)
+ 2.2 There can be no question that issue price must generally re-
F

late to liquor which is drawn by the contracor but it does not follow
therefrom that issue price cannot be adopted by agreement between the
parties as a measure of compensation to be paid in the case of undrawn
liquor. [527C-D)
G
Panna Lalv. State of Rajasthan, [1975] 2 SCR 633, referred to.

3.1 Even prior to the 1984 amendment, the amount which each of
the contractors was required to pay or to have adjusted was not excise
duty on undrawn liquor, but was part of the price which he had agreed
to pay for the grant of the privilege to sell liquor. [527D) H
516 SUPREME COURT REPORTS [1987] 2 S.C.R.

A 3.2 All rights in regard to manufacture and sale of intoxicants
vest in the State. It is open to the State to part with those rights for a
consideration. The consideration for parting with the privilege of the
State is neither excise duty nor licenee fee but it is the price of the
privilege. [527E-F]

B 3.3 Reading sections 17 and 23 of the Andhra Pradesh Excise Act
1968 together with the Andhra Pradesh Excise (Lease of Right to Sell
Liquor in Retail) Rules 1969 and Andhra Pradesh (Arrack Retail Vend
Special Conditions of Licences) Rules 1969, makes it evident that the
privilege of selling liquor, which includes the lease of the shop for an
area and.the licence to sell liquor therein may be granted by the State by
public auction subject to : (1) payment of rental being the highest bid at
c the auction, (2) the requirement that the licensee shall purchase arrack
at the issue priee, and (3) the further requirement that the licensee shall
purchase a minimum guaranteed quantity of arrack, which he has to
make good in case of short fall. The consideration for the grant of the
privilege to sell liquor is not merely the rental to be paid by the lessee
D but also the issue price of the arrack supplietI or treated as supplied in
case of short fall, which is also to be paid by the lessee-licensee. There is
no question of the lessee-licensee having to pay the excise duty though it
may be that the issue price is arrived at after taking into account the
excise duty payable. [5288-E)

E Panna Lal v. State of Rajasthan, [1975) 2 SCC 633; State of
Haryana v. Jage Ram, [1980] 3 SCR 746 and Har Shankar & Ors. v.
The Dy. Excise & Taxation Commr. & Ors., [1975] 1 SCC 737, refer-
red to.
\

Bimal Chandra Banerjee v. State of Madhya Pradesh, [1971] 1
F SCR 844; Madhya Pradesh v. Firm Cappulal etc., [1976] 2 SCR 1041 -t"
and Excise Commissioner, Unar Pradesh v. Ram Kumar, 1976 (Suppl)
SCR 532, distinguished.

4. The new s.17 of the Excise Act makes it clear that what is
proposed· to be granted is the exclusive previlege to manufacture or sell
G liqnor in the shape of a lease or licence or both. The explanation makes
it clear that the lease shall not take effect unless a licence is issued.
Having regard to the vital amendment of s.17, no further amendment of
s.21 and 22 was necessary. In the new s.23 it is now specified that the·
pa~ent in consideration of the grant of lease or licence or both for the
exclusive privilege is to be instead of or in addition to any excise duty or
H fees Ieviable in ss.21 and 22. The amendments effected to ss.17 and 23,
I

STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.) 517

therefore, have fulfilled the object of removing the vices or defects in A
the Act if indeed there were any. [533C-F]

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 437-
448 Of 1978 Etc.

From the Judgment and Order dated 18.1.1977 of the Andhra B
Pradesh High Court in Writ Petition No. 4485, 3399, 4979, 5819 of
1974.

Y.S. Chitale, SoliJ. Sorabjee, P.P. Rao, A.S. Nambiar, A. Chit-
ale, T.V.S.N. Chari, N. Mathur, W. Quadri, Ms. V. Grover, Ms.
Sunita Mudigouda, T.D. Ramayya, f'>· Mariarputham, T.C. Gupta,
K.V.G. Rama Rao and G. Narayana Rao for the appearing parties.
c
-·{
The Judgment of the Court was delivered by

CHINNAPPA REDDY, J. The primary question involved in th-
ese appeals and petitions is whether under the 'Excise-Law' prevailing D
in the State of Andhra Pradesh, the Government is entitled to claim
from the Excise Contractors who have failed to lift the 'Minimum
Guaranteed Quantity' of liquor the amount said to represent the
'excise duty component' in the issue price of liquor relating to such
unlifted quantity of liquor. A full bench of three judges of the High
Court of Andhra Pradesh, in V. Narasimha Rao v. Superintendent of E
Excise, AIR 1974 AP 157 held that the Government could but this
view was overruled by a Full Bench of Five Judges of the same High
Court in Atluri Brahmanandam v. Tahsildar of Gannavaram AIR 1977
AP 196 where it was held that the Government could not. It is the
judgment of the Full Bench of Five Judges which is in question in the
appeals and petitions filed by the Government. With a view to cure the F
defects pointed out by the Full Bench of Five Judges and to validate
the demands raised by the Government, the Andhra Pradesh Legisla-
ture enacted the Andhra Pradesh Excise Amendment Act X of 1984.
Demands raised pursuant to the Amending Act were upheld by the
High Court by a later judgment. The aggrieved Excise Contractors
have filed appeals and they are also before us. In some cases the G
contractors who had originally succeeded because of the decision of
the Five Judge Full Bench were again called upon to make good the
deficit after the Amending Act was passed. They questioned the fresh
demands but failed in the High Court. Their petitions for Special
Leave to Appeal are also before us.
H
518 SUPREME COURT REPORTS [1987] 2 S.C.R.

A Entry 51 of List II of the seventh schedule to the Constitution
empowers the State to levy duties of Excise on alcoholic liquors for
human consumption (not including medicinal and toilet preparations
containing alcohol) manufactured or produced in the State' and
counter availing duties on such alcoholic liquors manufactured or pro-
duced elsewhere in India. An Excise duty levied by the State on
B alcoljolic liquors is therefore, primarily a duty on the manufacture or
production of such alcoholic liquors. Section 2(10) of the Andhra
Pradesh Excise Act. 1968 defines "Excise. Duty" or "Countervailing
duty" to mean "the duty of Excise or countervailing duty, as the case
may be mentioned in Entry 51 is List II of the Seventh Schedule to the
Constitution." 'Excise Revenue' is defined by s.2(12) to mean
C 'Revenue derived or derivablt; from any duty, fee, tax, rent, fine,
penalty or confiscation levied, imposed or ordered under the provi-
sions of this Act or other law for time being in force elating to in-
toxicating drugs'. Section 17 of the Act, before and after the amend-
ment was and is as follows:
D
"Section 17 before amendment Section 17 as amended by Act
No. JO of 1984

Power to grant lease: Sec. 17: Grant of exclusive
E (i) The Government may, sub- privilege of manufacture etc:
ject to such conditions as (!) subject to the provisions
they may deem fit to impose, of s.28 and any rules made
grant for a fixed period to in this, the Govt·. may, subject
any person, at any_place a to such conditions as thay
lease jointly or severally may deem fit to impose, grant
F for a fixed period to any
for the supply, manufacture
or sale of any intoxicant. person at any place a lease
or licence or both either
Explanation: A lease shall jointly or severally for the
not take effect until the exclusive privilege- •
collector or any other comp-
G etent officer has issued (i) of manufacturing or of
a licence under this Act. supplying by wholesale or of
both, or
(2) The Government may (ii) or selling by wholesale
confer on any officer the or by retail, or
H power mentioned in sub-
STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.] 519

section(l). (iii) of manufacturing or of
A
supplying by wholesale, or of
both, and of selling by retail,
any liquor or other intoxicant
within any such area in the
State as may be specified in the
said order. B
Explanation: A lease shall not
take effect until the Collector
or any other competent officer
has issued a licence under
this Act.
(2) The Government may confer
on any officer the power men- c
tioned in sub-section(l)."

Sections 21and22 which remained unchanged are as follows:

"Section 21: Excise duty or Countervailing duty on excis- D
able articles: (1) The Govt. may, by notification levy an
excise duty on any excisable article manufactured or pro-
duced in the State at such rate, not exceeding the rates
mentioned in the Schedule, as may be specified in the
notification.
E
(2) The Govt. may by notification, levy a countervailing
duty on any excisable article manufactured or produced
elsewhere in India and imported into the State at such rate
as may be specified in the notification which may not ex-
ceed the rates on excise duty on similar excisable articles
+ levied under sub-section(l). F

(3) Different rates may be specified in sub-section(l) and
(2) for different kinds of excisable articles and different
modes of levying duties under s.22.

Section 22:- Modes of levying duties: The excise duty and G
the countervailing duty under s.21 shall be levied in one or
more of the following modes:

(a) rateably, on the quantity of any excisable article
produced or manufactured in ,or issued from a distillery,
brewery or manufactory or warehouse or imported into the H
State;
520 SUPREME COURT REPORTS [1987] 2 S.C.R.

(b) in the case of spirits or other liquors produced in any
A
distillery, brewery or manufactory in according with its
quality or strength or in accordance with such scale of equi-
valents calculated on the quantity of materials used, or by
the degree or attenuation of the wash or wort as the case
may be, prescribed;
B
( c) In the case of today, in the form of a tax on each variety J
of excise tree from which teddy is drawn having due regard
to the period during which such tree is capable of yielding
today; ) -~

(d) by fees on licences for the manufacture supply olale of .
c any excisable article."

Section 23 before and after amendment was as follows:

D "Section 23 before amend Section 23 as substituted by
ment Act IO of 1984.

Excise duty in respect of Sec. 23: Payment for exclu-
lease: Notwithstanding any- sive privilege: Instead of or
thing in Sections 21 and in addition to any excise
E 22, the sum accepted in con- duty or fees leviable under
sideration of the grant sections 21 and 22, the
of any release relating to Commissioner or any any other
any excisable article under competent officer may accept
s.17, shall be the excise payment of a sum in consi-
duty or countervailing deration of the grant of
F duty payable in respect of lease or licence or both
the excisable article, in for the exclusive privilege
addition to any duty or in respect of the liquor or
fees paid under s.21 & 22. any other intoxicant under
sec. 17.
Validation: Where before the
G
commencement of this Act,
any issue price (which
includes excise duty also)
has been collected or
recovered from the licensee
H in respect of short-drawn
STAIE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.) 521

or undrawn minimum guaranteed
A
1 quantity of arrack in pur-
' suance of rule 15 of the
A.P. Excise (Arrack Retail, Vend
and Special conditions of
Licences) Rules, 1969, by
deducting such price from B
the advance money paid by
the licensee, then, notwith-
•1 standing anything contained
,.., ;r-V-· in any judgment, decree or
order of any court, tribunal
or other authority to the
contrary, the price so c
collected or recovered shall
be deemed to be and shall be
deemed always to have been
validly collected or recovered
as consideration for the grant D
of lease or licensee or both to
the lessee or licensee for the
exclusive privilege in respect
of sale of liquor in accordance
with the provisions of the
principal Act as amended by this E
Act as if the amendments made

- +
to the principal Act by a
sections 2 and 3 of this Act
had been in force at all material
. times and accordingly
(a) all acts, proceedings or things
done or taken by the State Govt.
F

or by any officer of the State
Govt. or by any other authority
in connection with the collection
of such price shall for all
G
purposes, be deemed to be and to
~ have always been done or taken
in accordance with law;
(b) no suit or other proceeding
shall be maintained or contained
in any Court or before any authority H
522 SUPREME COURT REPORTS [1987] 2 S.C.R.

for the refund of and no
A enforcement shall be made by
any Court of other authority
of any decree or order directing
the refund of any such price which
has been collected as if the
B provisions of the principal Act
as amended by tjiis Act had been
in force at all material times."

The first entry in the Schedule to the Act is as follows:
c "No. Description of Mode of levying Maximum rate
excisable article duty of duty

1. Arrack on the quantity Rupees eight per
issued from the litre of the
D distillery of ware- strength of
house. proof spirit."

We mentioned earlier that the Andhra Pradesh Legislature
amended the Andhra Pradesh Excise Act to nullify the effect of the
E Full Bench judgment in Atluri Brahmanandam v. Tahsildar of
Gannavaram (supra). We may refer to the provisions of the amending
Act. Section 2 of the Amending Act provides for the substitution of a
-
new s.17 for the old. s.17. We have already extracted both the old and
the new sections. Sections 3 of the amending Act provides for the
stlbstitution of old s.23 by a new s.23. We have already extracted both
F the old and the new sections. Section 4 of the amending Act provides ~
for the Validation of earlier demands made in respect of issue price of
short-drawn minimum guaranteed quantity of liquor. It is necessary to
set out the whole of this provision. It is as follows:-

"4. Validation -Where, before the commencement of this
G Act, any issue price {which includes excise duty also) has
been collected or recovered from the licensee in respect of }-
short-drawn or undrawn minimum guaranteed quantity of
arrack in pursuance of rule 15 of the Andhra Pradesh
Excise {Arrack Retail, Vend and Special Conditions of
Licences) Rules, 1969, by deducting such price from the
H advance money paid by the licensee, then, notwithstanding
STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.l 523

anything contained in any judgment decree or order of any
court, tribunal or other authority to the contrary, the price A
so collected or recovered shall be deemed to be and shall be
deemed always to have been validly collected or recovered
as consideration for the grant of lease or licence or both of
the lessee or licensee for the exclusive privilege in respect
of sale of liquor in accordance with the provisions of the B
principal Act as amended by this Act as if the amendments
made to the Principal Act by sections 2 and 3 of this Act
had been in force at all material times and accordingly, :-
.. -·
~

(a) all acts, proceedings or thing done or taken by the
State Government or by any officer of the State Govern-
ment or by any other authority in connection with the col- c
lection of such price shall for all purposes be deemed to be
ancl to have always been done or taken in accordance with
law.

(b) no suit or other proceeding shall be maintained or con- D
tinued in any court or before any authority for the refund,
of, and no enforcement shall be made by any Court or
other authority of any decree or order directing the refund
of, any, such price which has been collected and which
would have been validly collected as if the provisions of the
Principal Act as amended by the Act had been in force at E
all material times.''

The Andhra Pradesh(Arrack, Retail Vend Special Conditions of
Licences) Rules, 1969 were made by the Government of Andhra
Pradesh in exercise of the powers conferred by various provisions of
"t the Andhra Pradesh Excise Act. Rule 7 obliges the licensee to buy F
arrack from a recognised distillery, warehouse or depot as may be
alloted by the department at the issue price as notified by the Commis·
sioner from time to time. Rule 11 provides for remittences of duty etc.
into the Government treasury. Rule 15 deals with minimum guaran-
teed quantity of liquor. It is necessary to extract the first two clauses of
rule 15 and they are as follows:- G

"15. Minimum guaranteed quantity of arrack-

( 1) No licensee shall purchase arrack less than the speci-
fied minimum guaranteed quantity in any month. If in any
month, quantity less than the minimum guaranteed H
524 SUPREME COURT REPORTS [1987] 2 S.Q.R.

quantity fixed for that month is drawn, at the.end of that
A
month issue price to the extent of deficit purchase shall be
deducted from the advance money paid by ti)e licensee
under the minimum quantity of arrack guaranteed by him
and the licensee shall be called upon to' indemnity the
a.mount so adjusted by the end of the succeeding,month in
.• which..short drawn quantity had occured .

. Provided that the Excise Superintendents may permit
the licensee to lift the short drawn minimum guaranteed
quantity of the previous month in the suceeding month for . · ,._ •
special reasons expert for the month of September, unless 1 ..,.
the licensee has committed default in lifting the mmimum
c guaranteed quantity for two successive months;

Provided further that where the Commissioner deems
it necessary to permit a shop keeper to draw the deficit
quantity short drawn in any month in the subsequent, he
D shall obtain the prior approval of the Government for
granting such perrnission.

(2) Where a licensee fails to lift the arrack as perrnit-
ted by the Excise Superintendent or to indemnity the
advance amount so adjusted by the end of the succeeding
E month in which the short dnt'wal of quantity had occurred,
the right acquired by the defaulting licensee shall be re-
auctioned forthwith."

Rule 17 prescribes "every licensee shall be bound by the provisions of
Andhra Pradesh Excise Act, 1968, and the rules and orders made
F under from time to.time." ~

The Andhra Pradesh Excise(Lease of right to sell liquor in retail)
rules 1969 are another set of rules made under the various provisions
of Andhra Pradesh Excise Act. Rule 2(ix) defines "rental" to mean
'the rent payable in respect of a shop or group of shops in considera-
G ti on of the grant of lease for sale of liquor'. Rule 3 provides for the
lease of the right to sell liquor in retail. Clause 1 of Rule 3 may be f-.. .
usefully extracted here and it is as follows:

"3. Lease to right to sell liquor in retail: (1) Subject to
the provisions of these rules, every lease of right to sell
H
STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.l 525

liquor in retail shall be granted by auction. The lease shall
ordinarily be for a period of one excise year; A

Provided that where the Commissioner considers it
'
necessary to grant the lease of right to sell liquor in retail in
,, any other manner, he shall do so with the prior approval of
. the Government." B

The rest of. the rules relate to the procedure to be followed at the
auction and thereafter. Rule 16 requires the auction purchaser to pay2
per cent of the annual rental as earnest money together with one
month's rental on the day of auction immediately after the acceptance
of tender or bid as the case may be. The earnest money and one
month's rental are to be in addition to the deposit of rental prescribed C
by Rule 18. Rule 18(1) provides for the deposit by auction purchaser
within fifteen days from the date of auction, two months' rental in cash
or in fixed deposit certificates. Rule 21 provides for execution of
counterpart agreement by the licensee in form 42. This is required to ·
be done before taking out a licence in respect of lease granted to him D
for the sale 'of liquor. Rule 22 provides that the lease shall not take
effect until the auction purchaser obtains a licence. Rule 24 prescribes
that every auction purchaser shall be bound by all the provisfons of the
Excise Laws which are in force or which may come into force and of
the rules or order5 made from time to time by the Government or
Commissioner or by the competent authority. The prescribed form for E
the counterpart agreement provides among other thing for an under-
taking that tbe licensee shall abide by "11 the provisions of the Andhra
Pradesh Excise Act and the Rules and Orders thereunder existing and
also those that would be issued from time to time in that respect. The
Andhra Pradesh Excise (Lease of right to sell liquor in retail) Rules,
1969 and the'.Andhra Pradesh Excise(Arrack, Retail Vend Special F
Conditions for Licences) Rules were duly amended in 1984. -

It is to be mentioned here that the issue price of arrack is notified
well in advance of the Excise year and the minimum guaranteed
quantity of liquor is.also fixed in regard to each shop well in advance of
the auction. The issue price is always a definite sum per bulk litre of G
liquor. The notification specifying the issue price does not attempt to
split up the issue price into various components such as cost price,
Excise duty, transport charges etc. Cost price, Excise duty and trans-
port charges are not separately and individually charged. Issue price is
the sum total of whatever has gone into the price of liquor at the time it
is issued and it is a single pre-determined definite sum and not the total H
526 SUPREME COURT RIEPORTS [19871 2 S.C.R.

of separate sums representing so many· specified components. For .
A
example, the issue price of arrack for the year 1979-80 was notified in
the following manner:-

"In exercise of the powers conferred by Rule 7(1) of the
Andhra Pradesh Excise (Arrack, Retail sale Spec'ial Condi-
B tions for Licences) Rules, 1969, the Commi·ssioner of
Excise, Andhra Pradesh, hereby notifies the is~.ue price of
arrack for the Excise Year 1979-80 at Rs.5.10 per bulk liter
of 30° U.P. strength and Rs.3 per bulk liter of 60° U.P.
strength."

C It is however not disputed that excise duty does enter the determina-
tion of the issue price but that has nothing to do with the excise con-
tractor whose obligation is to pay the whole of the issue price. As we >
said the issue price as well as minimum guanµ1teed quantity are both
fixed well in advance and it is with full knowledge off the issue price
and the minimum guaranteed quantity that every bidder participates in
D the auction. We wish to emphasise here that the 'issue p•rice' is that
which is not notified as issue price and not its compom:nts, if any.
These components which have come together to b•ecome 'issue price'
are not to be separated again. To borrow the analogy of Chemistry it is
a chemical compound and not a mechanical mixture. Excise duty loses
its identity, as it were, and becomes an inseparable part of 'issue
E price'. The learned counsel for the contractors however, argued that
excise duty was admittedly a part of issue price 2md that the legislature, ~
while amending the Excise Act in 1984, had also recognised the dis-
tinctive duty element in issue p·rice. He also iinvited our attention to
Narasimha Rao v. Superintendecnt of Excise (sup<ra). It is true that it is ~
not disputed that the element c1f excise duty has entered the issue price
F but that does not mean that it continues to 1tetain its character as -t
Excise duty. In V. Narasimbha Rao v. Superintendent of Excise
(supra), the High Court of Andhra Pradesh, after refering to Rule 11
of the retail vend Rules, observed that it could be safely taken that the
three items, namely, duty, cost and sales tax constituted the issue
price. It is one thing to say that several elements enter into the
G determination of is.sue price: but it is altogether a different thing to say
that these erstwhile constituent elements retain their character and ~
individually as such even after determination of issue price. In the
statement of objects and reasons of the amending Act there is refer-
ence to 'issue price' togetheT with excise duty' and 'issue price includ-
ing excise duty'. In s.4 of the amending Act there is a reference to
H 'issue prlce(which includes excise duty also)'. These references to issue
STATE
)
OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.] 527

price and excise duty are made in the context of the judgment of the A
Five Judge Full Bench of the Andhra Pradesh High Court which has
treated excise· duty as a severable element of issue price, the effect of
which was sought to be got rid by the amending Act. It was in that
context that there was a reference to the excise duty element of issue
price. We do not think that it is permissible for us to hold that the
element of excise duty which has gone into the determination of issue B
price continues to retain its individual character so as to be capable of
being severed and dealt with separately.

-- ,.._;.. ..
·
Basing himself on an observation made in Panna Lal v. State of
Rajasthan, [1975] 2 SCC 633 it was argued by the learned counsel on
behalf of the Excise Contractors, that issue price can only relate to C
liquor drawn by the contractors and cannot pertain to undrawn liquor.
~ There can be no question that issue price must generally relate to
liquor which is drawn by the Contractors but it does not follow there-
from that issue price cannot be adopted by agreement between the
parties as the measure of compensation to be paid in the case of
undrawn liquor. In fact, it may not be quiet correct even to view it as D
compensation as we shall presently see. It is no more and no less than
the price which the contractor agrees to pay for the grant of the
privilege to sell liquor, drawn or undrawn.

We may now examine the situation as it obtained before the
amending Act, 1984. It is well settled that all right in regard to E
manufacture and sale of intoxicants vest in the State. It is open to the
State to part with those rights for a consideration. The consideration
for parting with the privilege of the State is neither Excise duty nor
Licence fee but it is the price of the privilege. Section 17 of the Andhra
Pradesh Excise Act as it stood before the amendment provided for the
~ grant of a lease for the manufacture or sale of an intoxicant subject to F
such conditions as the Government deemed fit to impose. It also pro-
vided that a lease shall not take effect until a licence under the Act was
also issued. Section 21 provided for the levy of Excise duty on excis-
able articles and s.22 prescribed the mode of levy of excise duty.
Section 23 provided that, notwithstanding anything in sec. 21 and 22,
the sum accepted in consideration for the grant of any lease under s.17 G
was to be the excise duty payable in respect of that excisable article.
The marginal note of s.23 is "Excise duty in respect of lease". Rental
we have seen has been defined in the Andhra Pradesh (Lease of right
to sell liquor in retail) Rules, 1969, as meaning "the rent payable in
respect of a shop or group of shops in consideration of the grant of
lease for the sale of liquor". Rule 3 prescribes that every lease of right H
528 SUPREME COURT REPORTS [1987] 2 S_.C.R.

A to sell liquor in retail shall be granted by auction. Rule 7 of the Andhra
Pradesh (Arrack Retail Vend Special Conditions of Licences) Rules
prescribes that the licensee shall purchase arrack from the distillery,
warehouse or depot alloted by the Government and shall pay issue
price as notified by the Commissioner from time to time. Rule 15
provides for the purchase of a· specified minimum guaranteed quantity
B of arrack every month and for the adjustment of the issue price in case
of any short-fall irl the purchase of the minimum guaranteed quantity
of liquor. Thus reading sections 17 and 23 of Andhra Pradesh Excise I
Act together with the Andhra Pradesh Excise (Lease of Right to sell
liquor in retail) Rules, 1969 and Andhra Pradesh (Retail Vend Special_-~ ""
Conditions of Licences) Rules, the picture which emerges is that the '·
C privilege of selling liquor which includes the lease of the shop for an
area and the licence to sell liquor therein may be granted by the State
by public auction subject to (1) payment of rental being the highest bid )-
at the auction (It is to be noted here that rental is the rent payable in
consideration of grant of lease for the sale of liquor but it is not the sale
or exclusive consideration for the lease), (2) the requirement that the
D licensee shall purchase arrack at the issue price, and (3) the further
requirement that the licensee shall purchase a minimum guaranteed
quantity of arrack, which he has to make good in case of short fall. The
consideration for the grant of the privilege to sell liquor is not merely
the rental to be paid by the lessee but also the issue price of the arrack
supplied or treated as supplied in case of short fall, which is also to be
E paid by the lessee-licensee. There is no question cif the lessee-licensee
having to pay the excise duty though it may be that the issue price is
arrived at after taking into account the excise duty payable. If this is
the true position, the question arises whether the contractor can claim ,.......,
to deduct from the issue price payable by him in respect of short drawn
arrack, the amount said to be attributable to excise duty.
F
Once we have understood the true nature of 'issue price' and the
true consideration for the grant of the exclusive privilege to sell liquor,
the question posed in the previous paragraph is not difficult to answer.
We have guidance from several decisions of this Court.

G The first of the cases on which the learned counsel for the liquor
contractors relied was that of Bimal Chandra Banerjee v. State of •
Madhya Pradesh, [1971] 1 SCR 844. The successful bidders at an -
excise auction who had failed to take delivery of the prescribed
minimum quantity of liquor which they were required to sell under the
condition of auction were called upon to pay excise duty on the
H quantity of liquor which they had failed to take. Clause 2(c) of the
STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY. J.) 529

notification prescribing the conditions of auction provided that the con-
A
tractor had to make good every month "the deficit of monthly average
~ of the total minimum duty". The court found that none of the provi-
sions of the Act empowered the rule·making authority viz. the State
Government to levy tax on excisable articles which had not been either
imported, exported, transported, manufactured, cultivated or callee-
led under any licence or manufactured in any distillery established or B
distillery or brewery licenced under the Act. The Court said,
l'
"Quite clearly the State Government purported to levy

- .~---.._
duty on liquor which the contractors failed to lift. In so
doing it was attempting to exercise a power which it did not
possess. No tax can be imposed by any by-law or rule or
regulation unless the statute itself under which the subordi- c
~-. nate legislation is made specially authorises the imposition
even if it is assumed that the power to tax can be delegated
to the executive."

This was clearly a case where the State purported to levy excise duty on D
the unlifted quantity of liquor' and this could not be done under the
authority of law. '

.A The second case on which the learned counsel relied was that of
State of Madhya Pradesh v. Firm Gappulal etc., [1976] 2 SCR 1041. In
that case there was no dispute that the demand made on the con- E
tractors was in respect of duty on liquor which had not been lifted. It
was held that the demand could not be made. The decision of the court
in Panna Lat's case was distinguished on the ground that in that case
~ there was not levy of excise duty in enforcing the payment of the
guranteed sum or the stipulated lump sum mentioned in the licences. It
... was also pointed out that in Panna Lal's case the excise duty compo- F
nent of the issue price was found to be a measure of the quantum of or
extent of the concession or the remission to be given to the liquor
contractors. The lump sum amount payable for the exclusive privilege
was not to be confµsed with the issue price. In essence, it was said,
what was sought to be recovered from the liquor contractors in Panna
Lal's case was the shortfall occasioned on account of failure on the part G
l of liquor contractors to fulfil the terms of licence. Gappulal's case is
not of any assitance to the contractors in the present case as what was
sought to be recovered there, was undoubtelly zxcise duty which was
not leviable on unlifted liquor.

The third case relied on by the learned counsel for the con- H
530 SUPREME COURT REPORTS [1987] 2 S.C.R.

A tractors was that of Excise Commissioner, Uttar Pradesh v. Ram
Kumar, [1976] Suppl SCR 532. The licence granted to each of the ~
contractors in this case provided that on his failure to lift the monthly
proportonate quota in any month, he shall be liable to pay compensa-
tion to the State Government at the rate equal to the rate of stillhead
duty ... on the quantity falling short of such monthly proportionate
B quota. The contractors having failed to lift or sell the minimum
quantity of quota of liquor were required to compensate the State as
provided by the licence. The Court held that the demand though dis-
guised as compensation was in reality a demand for excise duty on the
unlifted quantity of liquor and that was not authorised by the provi-. _ ~.. _
sions of the Act. - \
c Thus we see that in Bimal Chandra Banerjee's case and Gappul-
al's case, what was sought to be recovered, was excise duty and in Ram
Kumar's case also what was sought to be recovered was excise duty,
though disguised as compensation. Such excise duty on unlifted liquor
was not leviable. Referring to these cases, Chandrachud, CJ. observed
D inStateofHaryanav.JageRam, [1980]3SCR746.

"Jn Bimal Chandra Banerjee's case, it-was held by this
court that the levy of excise duty on undrawn liquor was
beyond the power of the State Government and that there-
fore, the mle imposing the condition to that effect was
E invalid. That decision was followed in State of Madhya
Pradesh v. Firm Gappulal where also the licensees were
required to pay what was described as 'Pratikar' which was
nothing but excise duty on undrawn liquor. The same situa-
tion obtained in Excise Commissioner v. Ram Kumar be-
cause the real nature of the payment which the licensee
F were required to pay there, was excise dury on undrawn
liquor.

"These decisions cannot held the respondents be-
cause the true position, as we stated earlier, is that the
amount which the respondents are called upon to pay is not
G excise duty on undrawn liquor but is the price of a privilege
for which they bid at the auction of the vend which they
wanted to conduct."

The learned counsel for the State of Andhra Pradesh relied on
Har Shankar & Ors., v. The Dy. Excise & Taxation Commr. & Ors.,
H [1975] 1 SCC 737; Panna La/v. Stale of Rajasthan (supra) and State of
STATE OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.l 531

Haryano1 v. !age R.am (supra). In Har Shankar's case, it was held by a
A
Constitution Bench of the Court (Chandrachud, J. speaking for the
Court) that since ri,$ts in regard to intoxicants belonged to the State,
it was open to the Government to part with those rights for a consi-
deration. In a scheme providing for the parting of the right for a consi-
deration, it was no1t of the essence whether the amount charged to the
licences w:as pre-de\erminted or whether it was left to be determined by B
bids offered in auctions. The power of the Government to charge a
price for parting with its rights and not the mode of fixing that price
was constituted the essence of the matter. Nor indeed did the label

- ,.~affixed to the price <let.ermine either the true nature of the charge left
by the Government or its rights to levy the same. The amount charged
· was neither a fee properly so-called nor indeed a tax but was in the
nature of a price of the privilege which the purchaser had to pay in
c
-{ any trade or business transaction. Once it was appreciated that the
auctions were only a mode or medium for asertaining the best price
obtainable for the grant of a privilege to sell liquor, there would be no
further contradiction in them.
D
In Panna Lat's case, the court held:

"The agreements gave the liquor contractors an exclusive
privilege to sell country liquor in a specified area for the
period fixed for a stipulated sum of money for enjoying the
privilege. If the contractors do not sell any liquor, they are .E
yet bound to pay the stipulated sum. If they sell liquor,
they are given the benefit of remission in the price of the
exclusive privilege. The measure for this remission is the
excise duty leviable to the extent that the liquor contractor
can neutralise the entire amount of exclusive privilege in
the excise duty payable by them. If the contractors fail to F
lift adequate quantity of liquor and thereby fail in neutralis-
ing the entire price of exclusive privilege, the contractors
are not called upon to pay excise duty."

It was held that there was no leviable excise duty in enforcing the
payment of the guaranteed sum or the stipulated lump sum mentioned G
in the licence. We have already referred to the references made to
'rental' and 'issue price'. We finally come to the State of Haryana v.
!age: Ram (supra) which we may now take to be the last word on the
subj eel. Chandrachud, CJ spoke for the Court and said,:

"The amount which the respondents agreed to -pay to the H
532 SUPREME COURT REPORTS [1987]2 S.C.R.

State Government under the terms of the auction is neither
A
a fee properly so called which would require the existence
of a quid pro quo, nor indeed is the amount.in the nature of
excise duty, which by reason of the constitutional cons-
traints had to be primarily a duty on the production or
manufacture of goods produced or manufactured within
B the country. The respondents cannot therefore complain
that they are being asked to pay ·excise duty' or "stillhead
duty" on quota of liquor not taken, lifted or purchased b'y
them. The respondents agreed to pay a certain sum order
the terms of the auction and the Rules only prescribe a _, ~
convenient mode whereby their liability was spread over I
-
the entire year by splitting it up into fortnightly instal-
c ments. The Rules might as well have provided for payment
of a lump sum and the very issuance of the licence c-0uld )
have been made to depend on the payment of such sum. If
it could not be argued in that event that the lumpsum payment
represented excise duty, it cannot be so argued in the pre-
D sent event merely because the quota for which the respon-
dents gave their bid is required to be multiplied by a certain
figure per proof litre and further because the respondents
were given the facility of paying the amount by instalments
while lifting the quota from time to time. What the respon-
dents agreed to pay was the price of a privilege which the
E State parted with in their favour. They cannot therefore
avoid their liability by contending· that the payment which
they were called upon to make is truly in the nature:of
-
excise duty and that no such duty can be imposed on liquor
not lifted or purchased by them".

F The result of our discussion is that even prior to the 1984 amend-
ment, the amount which each of the contractors was required to pay or
have adjusted was not excise duty on undrawn liquor, but was part of'
the price which he had agreed to pay for the grant of the 'privilege to
sell liquor. The judgment of the High Court of Andhra Pradesh-in
At/uri Brahmanandam v. Tahsi/dar of Gannnvaram (supra) is re-
G versed. The appeals filed by the State of Andhra Pradesh are allowed.

We mentioned that in order to remedy the situatioll' resulting
from the Full Bench judgment of the Andhra Pradesh High Court, the
Andhra Pradesh Legislature enacted the Andhra Pradesh Exd_se
(Amendment) Act 10 of 1984. In the view that we have now taken.the'
H amendment of the Act has become a needless exercise. However, we c.
·STAIJ'E OF ANDHRA PRADESH v. Y.P. REDDY [REDDY, J.] 533

may 'briefly consider the attack on the amending Act. It was argued A
that the amending Act did not ·effectually remove the vices or defects
pointed •out by the Full Bench in Brahmanandam's case (supra) as
secs. 2[ and 22 were left in tact. It was said that without amending
secs. '21 and 22, the amendment of sec. 23 effected by the Andhra
Pradesh Legislature led ne where towards achieving the result aimed
B
at by the Legislature. Nor could the Legislature validate the demands
earlier made and struck down by the courts merely by enacting that the
demands were to be deemed to be valid without removing the vices or
'
-
defects from which those demands suffered. We are not inclined to
~ _ agreed with these submissions .. Sec. 17 of the Andhhra Pradesh Excise
Act which deals with the grant of the right to sell liquor has been
.substantially amended. Even the marginal note has been changed from c
·"·power to grant lease" to "grant of exclusive privilege of manufacture,
-( etc." The new sec. 17 makes it clear that what is proposed to be
granted is the exclusive privilege to manufacture or sell liquor in the
shape of a lease or licence or both. The explanation makes it clear that
.the lease shall not take effect unless a licence is issued. Having regard
D
to the vital amendment of sec .. 17, no further amendment of secs. 21
and 22 was necessary. The consequential amendment to sec. 23 has
however been made. Again the marginal note has been changed from
"excise duty in respect of lease" to "payment for exclusive pri-
vilege." It is now specified in the new section that the payment of the
same in consideration of the grant of lease or licence or both for the
E
exclusive privilege is to be instead of or in addition to any excise duty
or fees leviable in secs. 21 and 22. We are, therefore, satisfied that the
.amendments effected to secs. 17 and 23 have fulfilled the object of
removing the vices or defects pointed out by the Full Bench in Atluri
Brahmanandam's case, if indeed there were defects or vices. In the
result, the petitions for special leave to appeal filed against the judg-
F
..- ments of the Andhra Pradesh High Court upholding the amending Act
and the demands made by the excise authorities are dismissed.

P.S.S. Appeals & Petitions dismissed.

-