Holding

The State’s power to levy excise duty is limited to alcoholic liquor for human consumption; it cannot tax raw material or intermediate inputs, so demands on groups B, C and D are invalid, while the demand on group A is valid.

Summary

The State of Uttar Pradesh sought to levy excise duty on various categories of wastage arising in the manufacture of Indian Made Foreign Liquor (IMFL): (A) wastage exported outside the State, (B) wastage during transport of high‑strength spirit, (C) loss due to obscuration in rum production, and (D) pipeline loss. The Allahabad High Court quashed the State’s demand for groups B, C and D and allowed the writ petitions. On appeal, the Supreme Court held that the State’s power to impose excise duty is confined by Entry 51 of List II of the Constitution and the U.P. Excise Act, 1910, to “alcoholic liquor for human consumption”. Consequently, the State cannot tax raw material or intermediate inputs such as rectified spirit or wastage before dilution, rendering the demands for groups B, C and D ultra vires. The demand for group A, however, was upheld in line with the Delhi Cloth Mills precedent. The appeal was therefore allowed in part (group A) and dismissed in part (groups B‑D).

Issues considered

Whether the State can levy excise duty on wastage of IMFL at various stages of manufacture and transport.
Interpretation of the term “alcoholic liquor for human consumption” under Entry 51 List II.
Whether the State’s power to levy excise duty can be expanded by reference to its power to regulate manufacture.
Whether loss due to obscuration in rum production is taxable.
Whether wastage exported outside the State is subject to excise duty.

Legislation cited

Constitution of Indias. Seventh Schedule Entry 51 List II
U.P. Excise Act, 1910s. 11, s. 28, s. 3(22a), s. 8, s. 9
U.P. Excise Rules, 1910s. Rule 775

Subjects

Excise dutyAlcoholic liquor for human consumptionRaw materialWastageObscurationU.P. Excise ActConstitutional limitationEntry 51 List IIIndustrial alcoholRectified spirit

Judgment

STATE OF U.P. A
v.
MIS MODI DISTILLERY ETC. ETC.

AUGUST 29, 1995

[S.P. BHARUCHA, FAIZAN UDDIN AND S.B. MAJMUDAR, JJ.} B

U.P. Excise Act, 1910,-Sections 3(22a) and 28-Excise Duty-Power
of the State to levy excise duty with refere11ce to its power to regulate manufac-
ture of Indian Made Foreign Liquo1~1he State is not empowered to levy
excise duty on the raw material or input that is in the process of bei11g made C
into alcoholic liquor for huma11 consumptio11.

U.P. Excise Rules 1910 Rule 775-0bscuration Process- E:>..plained.

Constitution of Indi~Seventh schedule entry 51 of List II-Power of
the State to levy excise duty is limited by the Constitutio1r-Statute and Rules D
cannot expand the power.

Words And Phrase:.-'Alcoholic liquors for human consumption' and
'Rectified spirit'-Meaning of

The respondents are manufactures of Indian made foreign liquor. E
The appellant State sought to levy excise duty on the wastage of Indian
Made Foreign Liquor (IMFL) contended that the state was competent to
levy excise duty on liquor for human consumption. It was the content of
liquor in the IMFL which was exciseble. So wastage of liquor from the time
the process of manufacture of IMFL began, was exigible to excise duty in
exercise of its power under section 3(22-a) of U.P. Excise Act, 1910 and F
procedure under U.P. Excise Rules, 1910.

Respondents challenged the impugned demand before the High
Court of Allahabad by way of writ petition.

The High Court categorised the demands into four groups. In Group G
- 'A' the demands for excise duty were on the wastage of Indian Made
Foreign Liquor (IMFL) which was exported outside the State of Uttar
>
Pradesh. Group 'B' related to demands made for excise duty on wastage,
during transportation in containers, of high strength spirit of 80 to 85%
from distillery to warehouse, Group 'C' related to the demand of Excise H
119
120 SUPREME COURT REPORTS (1995) SUPP. 3 S.C.R.

A duty on obscuration and Group 'D' related to excise duty sought to be
levied on pipeline wastage.

In regard to Groups B, C and D the High Court took the view that
the stage at which the State could levy excise duty had not been reached.
The High Court allowed the writ petitions, and quashed the impugned
B orders demanding excise duty from them.

Hence these appeals by the state.

HELD : 1. The power of the State to levy excise duty was limited to
that conferred upon it by Entry 51 of List-II of the constitution. However
c wide the rules may be, the rules cannot extend the power of the State to
levy excise duty. The power of the State is limited by the Constitution and
the statute. [129-D-E]

2. The power of the State to levy excise duty cannot be expanded with
reference to its power to regulate manufacture. [129-G]
D
3. The expression 'alcoholic liquor for human consumption', means
that liquor which, as it is, is consumable in the sense that is capable of
being taking by human beings as such as a beverage or drink. Alcoholic
or intoxicating liquors had to be understood as they were, not what they
E were capable of or able to become. [127-F-G]

Synthetics and Chemicals Ltd. and Ors. v. State of U.P. and Ors.,
[1990] 1 sec 109, applied.

4. Rectified spirit for industrial purposes was defined as spirit
F purified by distillation having a strength not less than 95 per cent by
volume of ethyl alcohol which by itself was not only non-potable but was
highly toxic. In other words, ethyl alcohol (95 per cent) was not alcoholic
liquor for human consumption but could be used as a raw material or
input, afler processing and substantial dilution,in the production of whis-
ky, gin, country liquor etc. In the light of experience and development, it
G
was necessary to state that 'intoxicating liquor' meant only that liquor
which was consumable by human beings as it was. [128-8-D]

5. The State is not empowered to levy excise duty on the raw material
or input that is in the process of being made into alcoholic' liquor for
H human consumption. [128-F]
STATE v. MODI DISTILIERY[BHARUCHA,J.] 121

6. The process of obscuration takes place in the manufacture of rum, A
other than white rum. Therein caramd is added to plain spirit. This
results in obscuration or an apparent but not actual loss of proof gallons,
that is, of alcoholic strength. [128-H; 129-A]

7. The issue relating to Group 'A' regarding the demand for excise
duty on the wastage of Indian Made Foreign Liquor stands covered in B
favour of the Appellants. [121-G-HJ

State of U.P. and Others. v. Delhi Cloth Mills and Another, [1991) l
SCC 454 and Synthetics and Chemicals Ltd. v. State of U.P. and Ors., [1990)
l sec 109, relied on.
c
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 4324-32
of 1983 Etc. Etc.

From the Judgment and Order dated 11.10.79 of the Allahabad High
Court in C.M.W.P. Nos. 3316, 6058/73, 331, 412/76, 104.364, 2372, 4727/77 D
and 691 of 1978.

D.V. Sehgal, R.B. Misra and Nalin Tripathi for the Appellants.

Kapil Sibal and H.N. Salve, K.K. Lahiri, K.C. Dua and Tarun Dua
for the Respondents. E
The Judgment of the Court was delivered by

BHARUCHA, J. Leave granted.

These are appeals filed by the State of Uttar Pradesh against judg- F
ments and orders of the Allahabad High Court dated 9th March 1979 and
11th October, 1979, and orders that followed the same. The High Court
allowed writ petitions filed by the respondents, who are manufactures of
Indian made foreign liquor, and quashed the orders impugned demanding
excise duty from them.
G
The High Court m the judgment dated 11th October, 1979,
categorised to demands into four groups. In Group 'A' the demands for
excise duty were on the Wastage of Indian made foreign liquor (IMFL)
which was exported outside the State of Uttar Pradesh. Group 'B' related
to demands made for excise duty on wastage, during transportation in H
122 SUPREME CbURT REPORTS (1995) SUPP. 3 S.C.R.

A containers, of high strength spirit, of 80 to 85%, from distiller.y fo
warehouse. Group 'C' related to the demand of excise duty on obscuration.
Group 'D' related to excise duty sought to be levied on pipeline wastage.
The judgment of the High Court dated 9th March, 1979, related only to
duty on obscuration (i.e., Group 'C').
B It is convenient to state immediately that the issue relating to Group
'A', that is, the demands for excise duty on the wastage of IMFL exported
outside the State, is now covered in its favour by the judgment of this Court
in State of U.P. and Ors. v. Delhi Cloth Mills and Anr., [1991) 1 S.C.C. 454,
and this is not disputed by the manufacturers.
c
In regard to Groups B, C and D, the High Court took the view that
the stage at which the State could levy excise duty had not been reached.

Mr. Sehgal, learned counsel for the State, submitted that the State
was competent to levy excise duty on liquor for human consumption. It was
D the content of liquor in the IMFL which was exigible. Therefore, wastage
of liquor from the time the process of manufacture of IMFL began was
exigible to excise duty. In the alternative, Mr. Sehgal Submitted that if it
was the IMFL, the ultimate beverage, which alone was exigible, the process
of determining wastage and levying excise duty thereon was only regulatory
E and , therefore, permissible. Learned counsel for the manufacturers sup-
ported the view taken by the High Court. ~
Entry 51 of List II of the Seventh Schedule to the Constitution
empowers the State to Levy excise duty on 'alcoholic liquors for human
F consumption.''. Section 3(22-a) was introduced into the U.P. Excise Act,
1910, in 1950, that is, with the coming into force of the Constitution, and
it states that "excisable articles" means :

"(a) any alcoholic liquor for human consumption ; or

G (b) any intoxicating drug."

Sub-sections 8, 9 and 11 of Section 3 and Section 28 of the said Act
read thus :

"(8) 'spirit' means any.liquor containing alcohol obtained by distil-
H lation, whether it is denatured or not;
STATE v. MODI DIS'IlLIERY [BHARUCHA, J.] 123

(9) 'denatured' means rendered unfit for human consumption in A
such manner as may be prescribed by the State Government by
notification in this behalf. When it is proved that any spirit contains
any quantity of any substance prescribed by the State Government
for the purpose of denaturation the court may presume that such
spirit is or contains or has been derived from denatured spirit ; B
(11) 'liquor' means intoxicating liquor and includes spirits of wine,
spirit, wine, tari, pachwai, beer and all liquid consisting of or
containing alcohol, also any substance which the State Government
may by notification declare to be liquor for the purposes of this
Act;
c
28. Duty on excisable articles - (1) An excise duty or a counter-
vailing duty, as the case may be, at such rate or rates as the State
Government shall direct, may be imposed, either generally or for
any specified local area, on any excisable article - D
(a) imported in accordance with the provisions of Section 12(1);
or

(b) exported in accordance with the provisions of Section 13; or ·
E
(c) transported; or

( d) manufactured, cultivated or collected under any licence
granted under section 17; or

(e) manufactured in any distillery established, or any distillery of F
brewery licensed, under Section 18 :

provided as follows :

(i) duty shall not be so imposed on any article which has been
imported into India and was liable on such importation to duty G
under the Indian Tariff Act, 1894, or the Sea Customs Act, 1887.

Explanation - duty may be imposed under this section at different
rates according to the places to which any excisable article is to
be removed for consumption, or according to the varying strength H
124 SUPREME COURT REPORTS [1995) SUPP. 3 S.C.R.

A and quality of such article.

(2) The State Government shall, in imposing an excise duty or a
countervailing duty as aforesaid and fixing its rate, be guided by
the directive principles specified in Article 47 of the Constitution
of India.
B
(3) Such duty shall not exceed the maximum as provided
hereinafter -

(a) Countervailing duty on excisable articles imported in accord-
c ance with the provisions of Section 12(1)

Item Maximum rate
Description of excisable articles
No. of duty
1. Country liquor (excepting tai:i) 20 per litre.
D 2. Liquor manufactured in India and
sophisticated or coloured so as to resemble in
flavour or colour liquor imported into india;
and rectified spirit -
(a) Ale, beer, porter, cider and other 5 per litre.
E fermented liquors
(b) Perfumed spirit (other than medicinal and 15 per litre.
toilet preparations)
(c) Wines 8 per litre.

F ( d) Liquors, cordials, mixtures and other 70 per litre.
preparations containing spirit not otherwise
specified (other than drugs and medicines)
(e) Brandy, gin, whisky, rums, rectified spirit ·60 per litre of
and other sorts of spirit not otherwise alcohol.
specified.
G
3. Ganja 300 per kg.
4. Bhang 14 per kg.

(b) Excise or countervailing duty on excisable articles exported in
H accordance with the provisions of Section 13 -
STATE v. MODI DISTILIERY [BHARUCHA, J.] 125

Item Maximum rate A
Description of excisable articles
No. of duty Rs.
1. Country liquor (excepting tari and other 20.00 per litre
fermented alcoholic beverages) of alcohol.
2. Liquor manufactured tn India and 20.00 per litre
sophisticated or coloured so a to resemble in of alcohol. B
flavour or colour liquor imported into India
(excepting bear)
3. Beer Brewed in India 2.00 per litre
4. Ganja 150.00 per kg.
c
5. Bhang 4.00 per kg.

(c) Excise or countervailing duty on excisable articles transported-

Item Maximum rate
Description of excisable articles
No. of duty Rs. D
1. Country liquor (excepting tari) Rs. 20 per litre.
2. Liquor manufactured in India and
sophisticated or coloured so as to resemble in
flavour or colour liquor imported into India;
and rectified spirit - E
(a) Ale, beer, porter, cider and other 5 per litre
fermented liquors
(b) Perfumed spirit (other than medicinal and 15 per litre.
toilet preparations
F
(c) Wines 8 per litre.
( d) Liquors, cordials, mixture and other 70 per litre.
preparations containing spirit not otherwise
specified (other than drugs and medicines)
(e) Brandy, gin, whisky, rum, rectified spirit 60 per liter of G
and other sorts of spirit not otherwise alcohol.
specified
3. Ganja 300 per kg.
4. Bhang 14 per kg.
H
126 SUPREME COURT REPORTS [1995] SUPP. 3 S.C.R.

A ( d) Excise duty on excisable articles manufactured, cultivated or
collected under any licence granted under Section 17 -

Item Maximum rate
Description of excisable articles
No. of duty Rs.
1. Country liquor (excepting tari) Rs. 20 per litre.
B
2. Liquor manufactured Ill India and
sophisticated or coloured so as to resemble in
flavour or colour liquor imported into India;
and rectified spirit -
(a) Ale, beer, porter, cider and other 5 per litre
c fermented liquors
(b) Perfumed spirit (other than medicinal and 15 per litre.
toilet pi:eparations
(c) Wines 8 per litre.
D ( d) Liquors, cordials, mixtures and other 70 per litre.
preparations containing spirit not otherwise
specified (other than drugs and medicines)
( e) Brandy, gin, whisky, rum, rectified spirit 60 per liter of
and other sorts of spirit not otherwise alcohol.
E specified
3. Ganja 300 per kg.
4. Bhang 25 per kg.

( e) Excise duty on excisable articles manufactured in any distillery
F established, or any distillery or brewery licensed, under Sec-
tion 18 -

Item Maximum rate
Description of excisable articles
No. of duty Rs.

G Country liquor (excepting tari and other Rs.-20 per litre.
1.
fermented alcoholic beverages)
2. Liquor manufactured in India and
sophisticated or coloured so as to resemble. in
flavour or colour liquor imported into India;
and rectified spirit -
H
STATE v. MODI DISTILIERY [BHARUCHA, J.] 127

(a) Ale, beer, porter, cider and other 5 per litre A
fermented liquors
(b) Perfumed spirit (other than medicinal and 15 per litre.
toilet preparations
(c) Wines 8 per litre.
B
( d) Liquors, cordials, mixtures and other 70 per litre.
preparations containing spirit not otherwise
specified (other than drugs and medicines)
(e) Brandy, gin, whisky, rum, rectified spirit 60 per liter of
and other sorts of spirit not otherwise alcohol.
specified
c

(4) Notwithstanding anything contained in sub-section (3), the
maximum rate of duty on Ale, beer, porter, cider and other
fermented liquors occurring against item 2( a) in the table, in clause D
(e) of sub-section (3) shall be deemed to be Rupees 5 per litre
with effect from June 4, 1975 and any notification issued on or
after June 4, 1975 which is in conformity with the provisions of this
sub-section shall be deemed to be, and always to have been, valid
and lawful as if the provisions of this sub- section were in force at
all material times. E

It is convenient now to note the judgment of a bench of seven learned
Judges of this. Court in Synthetics and Chemicals Ltd. and Ors. v. State of
U.P. and Ors., {1990] 1 SCC 109. This Court stated that it had no doubt
that the framers of the Constitution, when they used the expression 'al-
F
coholic liquors for human consumption', meant, and the expression still
means, that liquor which, as it is, is consumable in the sense that it is
capable of being taken by human beings as such as a beverage or drink.
Alcoholic or intoxicating liquors had to be understood as they were, not
what they were capable of or able to become. Entry 51 of List II was the G
counterpart of Entry 84 of List I. It authorised the State to impose duties
of excise on alcoholic liquors for human consumption manufactured or
produced in the State. It was clear that all duties of excise save and except
the items specifically excepted in Entry 84 of List I were generally within
the taxing power of the Central Legislature. The State Legislature had H
128 SUPREME COURT REPORTS (1995] SUPP. 3 S.C.R.

A limited power to impose excise duties. That power was circumscribed
under Entry 51 of List II. It had to be borne in mind that, by common
standards, ethyl alcohol {which had 95 per cent strength) was an indus!rial
alcohol and was not fit for human consumption. The ISi specifications had
divided ethyl alcohol (as known in the trade) into several kinds of alcohol.
B Beverages and industrial alcohols were clearly and differently treated.
Rectified spirit for, industrial purposes was defined as spi_rit purified by
distillation ha\ing a strength not less than 95 per cent by volume of ethyl·
alcohol. Dictionaries and technical books showed that rectified spirit (95
per cent) was an industrial alcohol and not potable as such. It appeared,
therefore, that indusirial alcohol, which was ethyl alcohol {95 per cent);by
c itself was not only non-potable but was highly toxic. The range. of potable
alcohol varied from countP' 'pirit to whisky and the ethyl alcohol content
thereof varied _between 19 to about 43 per cent, according t_o the ISi
specifications. In other words, ethyl alcohol (95 per cent) was not an
alcoholic liquor for human consumption but· could be used as a raw
D material or input, after processing and substantial dilution, in the produc-.
tion of whisky, gin, country liquor, etc. In the light of experience and
development, it was necessary to state that 'intoxicating liquor' meant only
that liquor .which was consumable by human beings as it was.

E What the State seeks to levy excise duty upon in the Group 'B' cases
is the wastage of liquor after distillation, but before dilution; and, in the
Group 'D' cases, the pipeline loss of liquor during the process of manufac- ·
ture, before dilution. It is clear, therefore, that what the State seeks to levy
excise duty upon is not alcoholic liquor for human consumption but the
raw material or input still in process of being rendered fit for consumption
F · by human beings. The State is not empowered to levy excise duty on _the , .
raw material or input that is in the process of being made into alcoholic .
. liquor for human consumption.

That the measure of excise duty upon alcoholic liquor for human
G consumption is the alcoholic strength thereofdoes not make any difference
in this behalf. It is only the alcohol strength of the final product which is
relevant.

The process of obscuration, concerned in the Group ~c· cases, needs ,.
H explanation. The process of obscuration takes place in the manufacture of
STATE v. MODIDISTILIERY[BHARUCHA,J.] 129

rum, other than white rum. Therein, caramel is added to plain spirit. This A
results in obscuration or an apparent but not actual loss of proof gallons,
that is, of alcoholic strength. rt is upon this apparent loss that the State
seeks lo levy excise duty. The aspect of Obscuration is dealt with in Rule
775 of the U.P. Excise Rules. 1910. This rule indicates that the caramel is
added to plain spirit. In the writ petition out of which Special Leave B
Petition No. 3211/80 arises, it was averred thus : "Because at the stage at
which Caramel is added no spirit is ready or available for human consump-
tion and as such no duty be levied at that stage". In the reply filed by the
State there was no denial of the averment. It is, therefore, clear that the
obscuration is not of alcoholic liquor for human consumption and the levy
of excise thereon is beyond the State's power.
c
Mr. Sehgal drew our attention to Rule 775 aforementioned and
various other rules in the U.P. Excise Rules, 1910, which indicate the mode
of levy of excise duty upon alcohol other than alcoholic liquor for human
consumption. It will be remembered that the U.P. Excise Act, 1910, was D
amended in 1950 to include Section 3(22-a) whereby the power of the State
to levy excise duty was limited to that conferred upon it by Entry 51 of List
II. The Rules, however do not appear to have been similarly amended.
However wide the Rules rules may be, they cannot extend the power of
the State to levy excise duty, which is limited by the Constitution and the E
statute. It is , therefore, not necessary to refer to the Rules in any detail.

Mr. Sehgal submitted, in the alternative, that if it was the ultimate
beverage which alone was exigible, the process of determining the wastage
and levying excise duty thereon was only regulatory and, therefore, permis-
sible. We are here concerned with the demand of the State for excise duty.
F
The power of the State to demand excise duty is limited in the manner
aforementioned. The demand for excise duty is not a regulatory measure.
The power of the State to levy excise duty cannot be expanded with
reference to its power to regulate manufacture. We are not required to and
do not express any opinion in regard to the power of the State to regulate G
the manufacture of alcoholic liquors for human consumption.

In the result, the appeals are allowed only insofar as they relate to
the levy of excise duty upon the wastage of Indian made foreign liquor
exported outside the State of Uttar Pradesh. The Judgments and orders of H
130 SUPREME COURT REPORTS (1995) SUPP. 3 S.C.R.

A the High Court in so far as they hold that the State has no power to levy
excise duty upon such wastage are set aside. For the rest, the appeals are
dismissed and the judgments and orders under appeal upheld.

There shall be no order as to costs.

L.R. Appeals dismissed.

)