Holding

The licence fee is rent for the State’s privilege to manufacture and vend liquor; clauses 13.3 and 13.4 are not ultra vires, and the High Court’s judgment is set aside.

Summary

The State of Madhya Pradesh issued a Liquor Policy for 2005‑06 containing clauses that required retailers to pay the annual licence fee in 24 fortnightly instalments and allowed revocation of the licence for default. A circular clarified that liquor would only be supplied against such deposits. The High Court struck down clauses 13.3 and 13.4 as violative of Article 14 of the Constitution and Section 25 of the Madhya Pradesh Excise Act, 1915. On appeal, the Supreme Court held that the licence fee is essentially rent for the privilege of manufacturing and vending liquor, not an excise duty, and therefore the clauses are within the State’s authority. The Court also observed that the High Court had not considered the relevant precedents and had failed to give detailed reasons for its decision. Consequently, the High Court’s judgment was set aside and the appeals were allowed.

Issues considered

The nature of the licence fee payable by liquor retailers – whether it is rent for a privilege or an excise duty.
Whether clauses 13.3 and 13.4 of the 2005‑06 Liquor Policy and the accompanying circular are ultra vires Article 14 of the Constitution and Section 25 of the Madhya Pradesh Excise Act, 1915.
Whether the High Court was required to give detailed reasons when striking down the policy and circular.
Whether the doctrine of fairness and reasonableness can be invoked to alter the terms of a contract entered into with the State.

Legislation cited

Madhya Pradesh Excise Act, 1915s. 25

Subjects

licence feeliquor policyexcise dutycontract lawArticle 14ultra viresMadhya Pradesh Excise Actrent for privilegeadministrative law

Judgment

[2008] 13 S.C.R. 611

STATE OF M.P. & ORS. A
v.
LAUT JAGGI
(Civil Appeal No. 5751 of 2008)

SEPTEMBER 17, 2008
B
[S.H. KAPADIA AND 8. SUDERSHAN REDDY, JJ]

Excise:
Liquor vend - Licence fee - Nature of- Liquor Policy for
the year 2005-2006 framed by State of M.P. - Clauses 13.3 c
and 13. 4 and Circular of Excise Commissioner dated 9. 8. 2005
- Revocation of licence on failure to deposit fortnightly instal-
ment of licence fee by retail seller - Supply of liquor to such
seller on deposit of licence fee - High Court declaring clauses
.. 't- 13. 3 and 13.4 as ultra virus Article 14 of the Constitution and 0
' s.25 of M.P. Excise Act, 1915 - HELD: The licence fee, pay-
able in advance in 24 equal instalments, is in essence rent
charged for parting with State's privilege for manufacturing and
vending liquor and it is not a consideration for sale of liquor -
,, It is different from Issue Price - Rental is the consideration for E
the privilege granted by the Government for manufacturing
.
"i and vending liquor- There is no levy of excise duty in enforc-
ing payment of a stipulated sum mentioned in the licence -
The concepts of advance licence fee and excise duty are en-
-i tirely different - Despite exhaustive exposition of law by the F
Supreme Court on the nature of the payment of licence fee by
the auction purchaser, the High Court in the impugned judg-
ment has not considered any of the judgments while striking
down the relevant clauses of the Policy and the Circular-Judg··
ment of High Court set aside - Administrative Law - Policy
G
decision as regards liquor - Judicial review of - Contract -
Constitution of India - Articles 14 and 226 - Madya Pradesh
"" Excise Act, 1915- s.25. [para 7,9, 13] [614 G; 615 D; 619 G]

611 1-1
612 SUPREME COURT REPORTS [2008] 13 S.C.R.

A State of Orissa & Ors. Vs. Narain Prasad & Ors. (1996) 5
sec 740 - relied on.
State of Madhya Pradesh Vs. Firm Gappulal & Ors.,
[1976] 1 SCC 791; Bimal Chandra Banerjee Vs. State of MP
etc. AIR 1971 SC 517 - held inapplicable.
8
JUDGMENT/ORDER.'

Judgment of High Court striking down Policy/Circular -
HELD: When the High Court strikes down a Policy/Circular as
ultra vires, it is expected to give detailed reasons for saying
c so - In the instant case, no reasons are given in the impugned
iudgment. [para 13] [619 G-H]
CONTRACT.'

Liquor vend -Auction Purchaser- Failure to deposit fort-
D nightly instalment of licence fee - Liquor Policy challenged - ., ...,
High Court in writ petition striking down clauses of liquor policy
- HELD: The entire controversy arises in the contractual field
- The Sale Memo signed by the auction purchaser is nothing
but the contract - The High Court has not even considered
the General Licence Conditions stipulated in the Rules under
E the 1915 Act which stand incorporated in the Sale Memo and
which, inter alia, deal with payment of annual licnece fee in
instalments - Constitution of India, 1950 - Article 226 -
Madhya Pradesh Excise Act, 1915. [para 14] {620 A-BJ
Asstt. Excise Commissioner & Ors. Vs. Issac Peter & r -
F Ors. (1994) 4 sec 104 - relied on.
Case Law Reference:
[1976] 1 sec 791 held inapplicable para 8
AIR 1971 SC 517 held inapplicable para 8
G
(1996) s sec 740 relied on para 10
(1994) 4 sec 104 relied on para 12
CIVILAPPELLATE JURISDCTION: Civil Appeal No. 5751
of 2008
H
-\ i STATE OF M.P. & ORS. v. LAUT JAGGI 613

From the final Judgment and Order dated 17.1.2006 of A
the High Court of Judicature of Madhya Pradesh, Jabalpur in
W.P. No. 9310/2005
WITH
Civil Appeal Nos. 5752-5756/2008 B
S.K. Dubey, B.S. Banthia, Nandita Dubey and Yogesh
Tiwari for the Appellants.
Viviek Tankha, T.G. Narayanan Nair, Himanshu Gupta and
Shivaji M. Jadhav for the Respondent. c
The following Order of the Court was delivered
-1
1. Leave granted.
2. This Civil Appeal (arising out of S.L.P.(C) No.14286/
'
. )'
2006) is filed by the State of Madhya Pradesh against the judg- D
ment of the High Court dated 17th January, 2006 in Writ Petition
No.9310/2005. This judgment has been followed in all conjoint
matters, namely, Civil Appeals arising out of S.L.P.(C)
Nos.14287, 14288, 14290, 14291/2006 and 3788/2007.
~
E
3. By a Notification dated 21 •1 February, 2005, the State
~ Government framed a Liquor Policy for the year 2005-2006.
Clause 13 of that Policy prescribed the procedure for deposit-
ing the licence fee by a retailer of liquor. Sub-clause (1) of Clause
-·1 13 of the Policy stipulated that the annual licence fee would be
divided into 24 equal fortnightly instalments. It further stipulated F
that in lieu of the quantity of liquor purchased by the licence-
holder, duty deposited at the prescribed rates shall be adjusted
against his licence fee equivalent to the demand for the con-
cerning fortnight (see Clause 13.1 ). Under Clause 13.3, it was
stipulated that if any retail seller of liquor fails to deposit the G
prescribed fortnightly instalment of licence fee before expiry of
the next instalment due, then the license so granted could be
"" revoked and some other arrangement will be made to operate
the respective liquor shops. Under Clause 13.4, it was stipu-
lated that if any licence-holder of retail shop of any liquior de- H
614 SUPREME COURT REPORTS [2008] 13 S.C.R. y

A posits the prescribed fortnightly instalment before the expiry of
the fortnight b• 1t for some reason liquor could not be supplied
within the fortnight, then he shall be supplied liquor immediately
after the expiry of that fortnight.
~
4. Following the said Policy, a Circular came to be issued
B by the Excise Commissioner on 9th August, 2005 clarifying cer-
tain doubts expressed by District Excise Officers who had
granted permission to supply liquor even when the deposit of
fortnightly licence fee was made belatedly. By the said Circular,
it was clarified that liquor will be supplied to the contractors in a
c specific fortnight against the amount deposited and, in case, if
there is short-deposit, then the duty will be deposited in the next
fortnight but no liquor will be supplied during the fortnight in re-
spect of which there is a default.

D
5. The said Clause 13.3 and Clause 13.4 of the Policy ~ .
and the Circular referred to above came to be challenged vid:·
Writ Petition Nos.9310/2005, 1676/2006, 10799/2005, 11204/
2005, 11202/2005 and 311/2006.
6. By the impugned judgment, Clauses 13.3 and 13.4 were
E declared to be ultra vi res Article 14 of the Constitution and Sec;-
lion 25 of the M.P. Excise Act, 1915. Hence these Civil Appeals.
7. The key question which arises for determination in these
Civil Appeals is: What is the nature of payment which the auc-
tion purchaser makes to the State Government as and by way r -
F of licence fee for a given fortnight? In our view, before we come
to the relevant judgments on this aspect, it may be stated that
the licence fee, payable in advance in 24 equal instalments, is
in essence rent charged for parting with the State's privilege for
man1Jfacturing and vending liquor and it is not a consideration
G for sale of liquor. It is different from Issue Price. However, it has
been urged before the High Court on behalf of the auction pur-
...._
chase1· that the licence fee contains an element of excise duty
and, consequently, the State had no authority under the Act to
impose duty in advance on undrawn liquor.
H
STATE OF M.P. & ORS. v. LAUT JAGGI 615

8. While striking down Clauses 13.3 and 13.4 of the Policy, A
the Division Bench of the High Court relied upon two judgments
of this Court in the case of State of.Madhya Ptadesh Vs. Firm
Gappulal & Ors., reported in [1976] 1 sec 791, and in the case
of Bima/ Chandra Banerjee Vs. State of M.P. etc., reported in
AIR 1971 SC 517. B
9. Before we come to the relevant judgment, at the very
outset, it may be stated that these two judgments have no appli-
cation for the simple reason that there is a basic difference
· between excise duty and licence fee. Both the judgments dealt
with levy of excise duty on undrawn liquor. As stated above, rental c
is the consideration for the privilege granted by the Government
for manufacturing and vending liquor. There is no levy of excise
duty in enforcing payment of a stipulated sum mentioned in the
licence. The concepts of advance licence fee and excise duty
~ 'r are entirely different and this has been very succinctly brought D
out in two judgments of this Court which we shall presently refer.
10. In the case of State of Orissa & Ors. Vs. Narain Prasad
& Ors., reported in (1996) 5 SCC 740, a Division Bench of this
Court (B.P.Jeevan Reddy and K.S.Paripoornan, JJ.) in a Ian-
guagewhich has all the clarity at its command, has held:- E

"33. A review of the decided cases of this Court on the
subject indicates a clear shift in the way this matter has
been looked at. Initially, the matter was looked at from the
-('"""-., point of view of the levy of excise duty. On that basis, it F
was held that unless there is a sale, rio duty can be collected
(Bima/ Chandra Banerjee, Gappulal and Ram Kumar).
But then a different view point emerged with the Constitution
Bench decision in Har Shankarwhich was carried forward
in Panna Lal, Jage Ram and Y Prabhakara Reddy.
G
These decisions look at the matter from the point of view
')I(
of the several payments being, in truth and effect,
consideration forthe grant of privilege/licence. They point
out that the excise duty is a duty on manufacture and
production and not on sale. It was a case, they said, where
H
616 SUPREME COURT REPORTS [2008] 13 S.C.R.

A the duty was being passed on to the licensee who in turn
passed it on to the consumer. What all the licensee paid,
they held, is nothing but consideration for the grant of
licence and the mere fact that the total consideration fixed
comprises several elements (including excise duty), it
B cannot be said that excise duty is levied upon the licensee.
In our opinion, the Orissa matters fall under the ratio of
Panna Lal and Y Prabhakara Reddy and not under the
ratio of Bimal Chandra Banerjee, Gappulal and Ram
Kumar. The amounts mentioned in Rules 6 and 6-A, as
also the undertakings contained therein, together constitute
c the consideration for grant of privilege/licence, determined
by auction, as contemplated by Section 29 of the Act. As
explained hereinbefore, the obligation to remit the excise
duty is independent of the sale/purchase of liquor; it is
payable on or before the specified dates every month; it
D is an addition to the monthly instalment payable under
Rule 6; its remittance is not tied up to the purchase of
M.G.Q. except to the extent that the licensee has to pay
the prescribed instalment of excise duty prior to the lifting
of the liquor. It, therefore, cannot be said that there is any
levy of excise duty upon the licensee. The concept here is
E
altogether different. It is a case where the consideration
payable by the licensee for grant of licence is made up
of monthly rental plus excise duty besides the obligation
to purchase the M.G.Q. The licensee pays the rental and

F
excise duty as undertaken by him under the agreement/ r-
contract executed by him and as required by conditions of
the licence under which he is doing business, i.e., as and
by way of consideration. Indeed, the Rules could have
provided that the entire amount provided under Rules 6
and 6-A should be paid in advance before the issuance of
G licence in which event it could not have been contended
that it is not in consideration of grant of licence. Merely
because the Rules provide a concession and provide for
collection of the said amounts in convenient instalments
spread over the year, the nature and character of the
payments cannot change."
H
STATE OF M.P. & ORS. v. LALIT JAGGI 617
~

11. The judgment of this Court in State of Orissa Vs. Narain A
Prasad, which has considered the earlier two judgments of this
Court, has not been considered by the High Court in its im-
pugned judgment.
)- 12. In the case of Asstt. Excise Commissioner & Ors. Vs.
Issac Peter & Ors., reported in (1994) 4 SCC 104, a three Judge B
Bench of this Court once again, speaking through Justice Jeevan
t
Reddy, has succinctly brought out the concept of the licence fee
payable by the auction purchaser vide para 26 which we quote
in extenso hereinbelow:-
c
"Learned counsel for respondents then submitted that
:'j
doctrine of fairness and reasonableness must be read
into contracts to which State is a party. It is submitted that
the State cannot act unreasonably or unfairly even while

"'
.,. acting under a contract involving State power. Now, let us
D
$ee, what is the purpose for which this argument is
addressed and what is the implication? The purpose, as
we can see, is that though the contract says that supply of
additional quota is discretionary, it must be read as
obligatory - at least to the extent of previous year's
supplies - by applying the said doctrine. It is submitted E
that if this is not done, the licensees would suffer monetarily.
The other purpose is to say that if the State is not able to
so supply, it would be unreasonable on its part to demand
the full amount due to it under the contract. In short, the
,' ·1,
~-

duty to act fairly is sought to be imported into the contract F
to modify and alter its terms and to create an obligation
upon the State which is not there in the contract. We must
confess, we are not aware of any such doctrine of fairness
or reasonableness. Nor could the learned counsel bring
to our notice any decision laying down such a proposition. G
Doctrine of fairness or the duty to act fairly and reasonably
)I is a doctrine developed in the administrative law field to
ensure the rule of law and to prevent failure of justice where
the action is administrative in nature. Just as principles of
natural justice ensure fair decision where the function is H
618 SUPREME COURT REPORTS [2008] 13 S.C.R.

A quasi-judicial, the doctrine offairness is evolved to ensure
fair action where the function is administrative. But it can
certainly not be invoked to amend, alter or vary the express
terms of the contract between the parties. This is so, even
if the contract is governed by statutory provisions, i.e.,
B where it is a statutory contract -- or rather more so. It is
one thing to say that a contract- every contract- must be
construed reasonably having regard to its language. But
this is not what the licensees say. They seek to create an
obligation on the other party to the contract, just because
c it happens to be the State. They are not prepared to apply
the very same rule in converse case, i.e., where the State
has abundant supplies and wants the licensees to lift all
the stocks. The licensees will undertake no obligation to
lift all those stocks even if the State suffers loss. The one-
sided obligation, in modification of express terms of the
D
contract, in the name of duty to act fairly, is what we are
"f -
unable to appreciate. The decisions cited by the learned
counsel for the licensees do not support their proposition.
In Dwarkadas Marfatia v. Board of Trustees of the Port of
Bombay it was held that where a public authority is
E exempted from the operation of a statute like Rent Control
Act, it must be presumed that such exemption from the
statute is coupled with the duty to act fairly and reasonably.
The decision does not say that the terms and conditions
of contract can be varied, added or altered by importing r •
F the said doctrine. It may be noted that though the said
principle was affirmed, no relief was given to the appellant
in that case. Shrilekha Vidyarthi v. State of UP was a
case of mass termination of District Government Counsel
in the State of U. P. It was a case of termination from a post
G involving public element. It was a case of non-government
servant holding a public office, on account of which it was
held to be a matter within the public law field. This decision
too does not affirm the principle now canvassed by the
learned counsel. We are, therefore, of the opinion that in
H case of contracts freely entered into with the State, like the
STATE OF M.P. & ORS. v. LALIT JAGGI 619
-j
i
present ones, there is no room for invoking the doctrine of A
fairness and reasonableness against one party to the
contract (State), for the purpose of altering or adding to the
terms and conditions of the contract, merely because it
happens to be the State. In such cases, the mutual rights
)
and liabilities of the parties are governed by the terms of B
the contracts (which may be statutory in some cases) and
the laws relating to contracts. It must be remembered that
these contracts are entered into pursuant to public auction,
floating of tenders or by negotiation. There is no compulsion
on anyone to enter into these contracts. It is voluntary on c
-1
~ both sid~s. There can be no question of the State power
(
being involved in such contracts. It bears repetition to say
that the State does not guarantee profit to the licensees in
such contracts. There is no warranty against incurring losses.
It is a business for the licensees. Whether they make profit
.... ~
D
or incur loss is no concern of the State. In law, it is entitled
to its money under the contract. It is not as if the licensees
are going to pay more to the State in case they make
substantial profits. We reiterate that what we have said
hereinabove is in the context of contracts entered into
between the State and its citizens pursuant to public auction, E
floating of tenders or by negotiation. It is not necessary to
~
say more than this for the purpose of these cases. What

__ , would be the position in the case of contracts entered into
otherwise than by public auction, floating of tenders or
negotiation, we need not express any opinion herein." F

13. We are surprised that despite exhaustive exposition
of law by this Court on the nature of the payment of licence fee
by the auction purchaser, the High Court in its impugned judg-
ment has not considered any of the above judgments while strik-
G
ing down the relevant clauses of the Policy and the Circular.
Moreover, the reasoning given in the judgment is cryptic. When
~ the High Court strikes down the Policy/Circular as ultra vires,
we expect the High Court to give detailed reasons for saying
so. No reasons are given in the impugned judgment.
H
620 SUPREME COURT REPORTS [2008] 13 S.C.R.

A 14. Before concluding, we may state that the entire con-
troversy arises in the contractual field. The Sale Memo signed
by the auction purchaser is nothing but the contract. The High
Court has not even considered the General Licence Conditions
stipulated in the Rules under the Act 1915 which stands incor-
B porated in the Sale Memo and which, inter alia, deals with pay-
ment of annual licnece fee in instalments. None of the above
facts have been considered by the Division Bench of the High
Court while proceeding to set aside Circular/Policy as ultra vires
Section 25 of the M.P. Excise Act, 1915.
C 15. For the afore-stated reasons, the impugned judgment
is set aside and the Civil Appeals stand allowed with no order
as to costs.
R.P. Appeals allowed.

.,, -