Holding

The condition demanding payment of the full cost of excise supervisory staff is a valid consideration under Sections 18 and 27 of the Madhya Pradesh Excise Act and is not ultra vires.

Summary

The State of Madhya Pradesh granted a D‑2 licence, in the form of a lease, to Mis. K.C.T. Drinks Ltd for manufacturing Indian Made Foreign Liquor. The licence contained a condition that the licensee pay the full cost of excise supervisory staff posted at its factory. The High Court struck down this levy, relying on the view that Rule 22 of the Madhya Pradesh Breweries Rules was ultra vires. On appeal, the Supreme Court held that under Sections 18 and 27 of the Madhya Pradesh Excise Act, 1915 the State may accept a lump‑sum payment as consideration for the lease, which includes the cost of supervision, and that such a condition is not illegal or ultra vires. The Court also clarified that the licence was issued under the Distillery & Warehouse Rules, not the Breweries Rules. Consequently, the High Court’s order was set aside and the appeal was allowed.

Issues considered

Whether the condition requiring the licensee to pay the full cost of excise supervisory staff is ultra vires or illegal under the Madhya Pradesh Excise Act and related rules.
Whether Rule 22 of the Madhya Pradesh Breweries Rules applies to a D‑2 licence issued under the Distillery & Warehouse Rules.
Whether the State can recover the actual cost of supervisory staff as consideration for the grant of a licence under Sections 18 and 27 of the Madhya Pradesh Excise Act.

Legislation cited

Bombay Prohibition Act, 1949s. 58A
Madhya Pradesh Excise Act, 1915s. 18, s. 27, s. 62(2)(e), s. 62(2)(g), s. 62(2)(h)

Subjects

Excise lawLicence leaseSupervisory staff costConsiderationUltra viresSection 18Section 27Establishment charges

Judgment

A STATE OF MADHYA PRADESH AND ORS.
v.
MIS. K.C.T. DRINKS LTD.

MARCH 4, 2003

B
[M.B. SHAH, ASHOK BHAN AND ARUN KUMAR, JJ.]

Excise laws:

C MP. Excise Act, 1915-Sections 18 and 27-Grant of licence in terms
of lease to manufacture liquor-Levy of full cost of supervision and
establishment cost-Validity of-Held, the condition empowering State
Government to recover cost of supervisory staff posted at licensee's premises
not illegal or ultra vires as-it constitutes price or consideration which
Government charges to licensee for parting with its privilege and granting
D license.

State Government granted a licence in terms of the lease for
manufacture of Indian Made Foreign Liquor to the respondent•company.
Respondent-company challenged the levy of full costs of supervision and
E establishments of excise staff posted at its factory premises. High Court
quashed the levy of expenses incurred on supervision and e$tablishment
cost. Hence the present appeal.

Allowing the appeal, the Court

HELD: l.1. In view of Sections 18 and 27 of the M.P. Excise Act,
F 1915, the State Government is entitled to accept payment of a sum in
consideration of grant of any lease in lump sum in addition to any duty
leviable under the Act on terms and conditions which are mentioned in
the licence deed. Condition 8 of the licence provides that the licensee shall
pay the full cost of excise supervisory staff posted at its premises.
G [577~D]

1.2. Ir view of the settled legal position, the condition empowering
~he state Government to recover the actual cost of supervisory staff posted.
at the premises of respondent cannot be said to be in any way illegal or .
ultra vires as it constitutes the price or consideration which tht!_ Government
H 574
STATE v. K.C.T. DRINKS LTD. [SHAH, J.] 575

charges to the licensee for parting with its privilege and granting licence. A
Thus, the order of High Court is set aside. (579-E)

Mis. Lilasons Breweries (Pvt) Ltd. v. State of Madhya Pradesh, [1992)
3 SCC 293; Government of Andhra Pradesh v. Mis. Anabeshahi Wine and
Distilleries Pvt. Ltd., (1988( 2 SCC 25; Shri Bileshwar Khalid Udyog Khedut
Sahakari Mandali Ltd. v. State a/Gujarat and Ors., (1992) 2 SCC 42; Gujchem B
Distillers India Ltd. v. State of Gujarat, (1992) 2 SCC 399, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7463 of 1993.

From the Judgment and Order dated 4.5.1993 of the Madhya Pradesh
High Court in M.P. No. 1456 of 1993. C
Ramesh Singh for Satish K. Agnihotri, for the Appellants.

Ex-parte.

The Judgment of the Court was delivered by. D
SHAH, J. The respondent company having a D-2 licence for
manufacture of Indian Made Foreign Liquor from rectified spirit by blending,
reducing and ·compounding Indian Made Foreign Liquor concentrate,
challenged the levy of full costs of supervision and establishments of excise
staff posted at its factory premises by filing M.P. No.1456 of 1993 in the E
High Court of Madhya Pradesh at Jabalpur. By judgment and order dated
4.5.1993, the High Court quashed the levy of expenses incurred on supervision
and establishment cost on the ground that Rule 22 of M.P. Breweries Rules,
1970 was struck down as ultra vires by this Court in case of Mis. Lilasons
Breweries (Pvt) Ltd. v. State of Madhya Pradesh, [1992) 3 SCC 293. In p
Mis. L"ilasons Breweries (Pvt) Ltd. 's case, this Court arrived at the conclusion
' 22 to the extent it permits raising a demand, which· in sum and
that ~ule
s·ubstance is additional excise duty, without its being actually due, is ultra
vires the Act and beyond the rule making power of the State.

Impugned judgment and order passed by the High Court is challenged G
by filing this appeal.

It has been pointed out that the High Court proceeded on a misconception
that D-2 licences were issued under Rule 22 of the M.P. Breweries Rules,
1970. As a matter of fact, licences were issued under Rules (IV) and (V) of
the Distillery & Warehouse Rules. It is pointed out that Brewery Rules are H
576 SUPREME COURT REPORTS [2003] 2 S.C.R.

A not applicable to the unit of the respondent as it is not a brewery.

In support of the aforesaid contention, learned counsel for the appellants
has drawn our attention to the Rules applicable to all distilleries and warehouse
in Madhya Pradesh. Releva.1t Rules (IV) & (V) for the grant of licence are
as under:
B
IV. The Collector may issue, on payment of a fee of Rs. 1000 a
licence in Form D-2 for the construction and working of a
distillery to any person to whom a wholesale supply licence has
been issued.

C V. Subject to sanction of the State Government the Excise
Commissioner may issue a licence in Form D-2 for the
construction and working of a distillery on payment of a fee of
Rs. 1000.

These Rules are framed by the State Government in exercise of powers
D conferred under Section 18 read with Section 62(2)(e)(g) & (h) of the M.P.
Excise Act, 1915. Section 62(2)(h) empowers the State Government to make
Rules prescribing the scale of fees or the manner of fixing the fees payable
in respect of any licence, permit or pass. Section 18 empowers the State
Government to lease to any person the right of manufacturing or of supplying
or of selling liquor or intoxicating drug within any specified area, which is
E under:

"18. Power to grant lease of right to manufacture, ·etc. The State
Government may lease to any person, on such conditions and for
such period as it may think fit, the right:

F (a) of manufacturing, or of supplying by wholesale, or of both, or

. (b) of selling by wholesale or by retail, or
.(c) of manufacturing or of supplying by wholesale, or of both, and
selling by retail,

G any liquor or intoxicating drug within any specified area.

2. The ;;censing authority may grant to a lessee under su!J-section ( 1)
a licence in the terms of his lease; and when there is no condition in
the lease which prohibits sub-letting, may, on the application of the
lessee, grant a licence to any sub-lessee approved by such authority."
H
STATE v. K.C.T. DRINKS LTD. [SHAH, J.) 577
Section 27 also empowers the State Government to accept the payment A
of a sum in consideration of grant of any lease under Section 18, which is
as under:

"27. Payment for grant of leases. (I) Instead of or in addition to any
duty leviable under this Chapter, the State Government may accept
payment of a sum in consideration of the grant of any lease under B
Section 18.

(2) Nothing contained in sub-section (I) shall be construed to
preclude the State Government from enhancing or reducing the sum
received in consideration of a grant of any lease under Section 18
during the course of a financial year or during the currency of a C
licence and the power to enhance or reduce the sum shall include
power to give retrospective effect to such enhancement or reduction
from a date not earlier that the commencement of the financial year."

In view of Sections 18 and 27, the State Government is entitled to D
accept payment of a sum in consideration of grant of any lease in lump sum
in addition to any duty leviable under the Act on terms and conditions which
are mentioned in the licence deed. Condition 8 of the licence provides that
the licensee shall pay the full cost of excise supervisory staff posted at the
· premises of KCT Drinks, Mandideep, Distt. Raisen.
E
Similar provisions were considered by this Court and their validity is
upheld in Government of Andhra Pradesh v. Mis Anabeshahi Wine and
Distilleries Pvt. Ltd, [1988) 2 SCC 25 wherein this Court observed thus:

"5. The perusal of the aforesaid provisions of the Act and the
Rules leaves no manner of doubt that it was open to the appellant to F
grant the exclusive privilege of manufacturing and selling wine etc.
to the respondent only provided it was, apart from making any other
payment, also willing to pay the salaries and allowances referred to
in the aforesaid provisions which for the sake of convenience have
... been described as establishment charges, and which were sought to
be recovered as such under the impugned notice of demand. The G
respondent-Company was not under any obligation to take the licence.
It was open to it to have refrained from taking any licence under the
Act and the Rules if it was not willing to pay the price as required
by the government for the grant of privilege to manufacture and sell
intoxicants. The nature of the payment which a licensee such as the H
-J
578 SUPREME COURT REPORTS [2003) 2 S.C.R.

A respondent is required to make to the State by reason of the State
parting with the privilege in regard to manufacture sale etc. of
intoxicants came up for consideration before a Constitution Bench of
this Court in Har Shankar v. Deputy Excise and Taxation
Commissioner, [1975] 3 SCR 254. It was held that the amounts
charged to the licensees are neither in the nature of tax nor excise
B duty, but constituted the price or consideration which the government
charges to the licensees for parting with its privileges and granting
them to the licensees.........

6. The principles laid down in the aforementioned cases will, in
our_ opinion, apply to the instant case also. The fact of the demand
c being with regard to establishment charges will make no difference.
A predetermined amount equivalent to or even higher than the amount
which is sought to be recovered by the appellant from the respondent
calculated for the entire period of the licence could have been
demanded in a lump sum as price for parting with the privilege and
D it could not have been challenged by the respondent in view of the
principle enunciated by this Court in the aforesaid cases. Simply
because the demand was spread over with a view to making it just
and reasonable so as to represent the actual expenditure incurred by
the government to maintain the requisite excise staff at the factory
premises of the respondent as contemplated by the relevant provisions
E of the Act and the Rules, it would not become illegal and vulnerable."

In Shri Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd v. State
of Gujarat and Anr., [I 992] 2 SCC 42 validity of demand under Section 58A
of the Bombay Prohibition Act, 1949 for maintenance of excise staff for
F supervision of manufacture of industrial alcohol was assailed on the ground
of lack of legislative competence of the State. In that case, the Court observed
thus:

"4. According to learned counsel since the entire judgment of the
High Court proceeded on privilege theory it cannot withstand the
G principle laid down in Synthetics and Chemicals Ltd v. State of U.P.,
[1990] 1 SCC 109. Levy as a fee under Entry 8 of List II of Seventh
Schedule or excise duty under Entry 51 are different than cost of
supervision charged under Section 58-A. The former has to stand the I'

test of a levy being in accordance with law on power derived from
one of the constitutional entries. Since Synthetics and Chemicals Case
H. finally brought down the curtain in respect of industrial alcohol by
STA TE v. K.C.T. DRINKS LTD. [SHAH, J.) 579

taking it out of the purview of either Entry 8 or 51 of List II of A
Seventh Schedule the competency of the State to frame any legislation
to levy any tax or duty is excluded. But by that a provision enacted
by the State for supervision which is squarely covered under Entry 33
of the Concurrent List which deals with production, supply and
distribution which includes regulation cannot be assailed. The bench B
in Synthetics and Chemicals case made it clear that even though the
power to levy tax or duty on industrial alcohol vested in the Central
Government the State was still left with power to lay down regulations
to ensure that non-potable alcohol, that is, industrial alcohol, was
not diverted and misused as substitute for potable alcohol. This is
enough to justify a provision like Section 58-A. In paragraph 88 of C
the decision it was observed that in respect of industrial alcohol the
States were not authorised to impose the impost as they have purported
to do in that case but that did not effect any imposition offee where
there were circumstances to establish that there was quid pro quo for
the fee nor it will affect any regulatory measure. This completely
demolishes the argument on behalf of the appellant." D
The aforesaid decision was referred to and relied upon in Mis. Gujchem
Distillers India ltd v. State of Gujarat, [1992] 2 SCC 399.

In view of the aforesaid settled legal position, the condition empowering
the State Government to recover the actual cost of supervisory staff posted E
at the premises of respondent cannot be said to be in any way illegal or ultra
vires as it constitutes the price or consideration which the Government charges
to the licensee for parting with its privilege and granting licence. In this view
of the matter, the impugned judgment and order passed by the High Court
requires to be set aside. F
In the result, the appeal is allowed and the impugned judgment and

- order passed by the High Court is set aside. There shall be no order as to
costs.

N.J. Appeal allowed. G