Holding

The State may legislate on the denaturation of industrial spirit and impose a reasonable regulatory fee without a quid pro quo, and the 7 paise per litre fee is valid.

Summary

Vam Organic Chemicals Ltd. and two other firms, licensed to produce industrial alcohol (rectified spirit) for chemical manufacturing, challenged Uttar Pradesh's Notification No. 25/Licence/Part‑3 dated 18‑May‑1990 which imposed a denaturation fee of 7 paise per litre under Section 41 of the U.P. Excise Act, 1910. The petitioners argued that the State lacked legislative competence to regulate industrial alcohol or levy any tax, and that the fee, being a regulatory charge, required a quid pro quo. The Supreme Court held that because rectified spirit can be diverted for human consumption, the State may legislate and impose regulatory fees under Entries 6, 8 and 51 of List II and Entry 84 of List I of the Seventh Schedule. The Court clarified that regulatory fees do not need a quid pro quo, only reasonableness, and found the 7‑paise rate reasonable. Consequently, the appeals were dismissed, upholding the notification.

Issues considered

The State's legislative competence to regulate industrial/alcoholic spirits and to levy a denaturation fee under the Constitution's distribution of powers.
Whether a denaturation fee is a regulatory fee that requires a quid pro quo relationship with services rendered.
Whether the rate of 7 paise per litre is reasonable and not excessive.

Legislation cited

Constitution of Indias. 110(2), s. 246, s. 248, s. 254
U.P. Excise Act, 1910s. 41

Subjects

industrial alcoholdenaturation feeregulatory feelegislative competenceexcise lawconstitutional division of powersfee reasonablenessquid pro quo

Judgment

VAM ORGANIC CHEMICALS LTD. AND ANR. A
v.
THE STATE OF UTTAR PRADESH AND ORS.

JANUARY 21, 1997

[AM. AHMADI 0. ANDS. C. SEN, J.] B

f U. P. Excise Act 1910-Section 41 Rule 2. read with Sec. 2 and 18-G
of the Industries Development and Regulation Act 1956-lndustrial Alcohol
Denaturation of spirit-Notification No. 25/Licence/3 dated 18-5-1990,regard-
ing levy of denaturation fee-Legislative competence of State--Held, so long C
as any alcoholic preparation can be diverted to human consumption, the states
shall have the power to legislate as also to impose taxes etc. and denaturation
of spirit is not only an obligation on the States but also within the competence
of States to enforce--Denaturation fee is in the nature of regulatory fee for
which quid pro quo is not necessary--Held, rate of fee of 7 paise per litre is, D
on facts-Reasonable-Constitution of India, Arts. 246, 254, 248 and Sch. VII
List-II Entries 8, 51, 6, 24, 66, List-I Entries 84, 52, List-III Entry 33.

Constitution of India.

Articles 110(2), 99(2}-Regulatory/Licence fees different from fees for E
services rendered-For regulatory fee quid pro quo not necessary though
impost should be reasonable.

Entries 8 and 51 of List-II read with Entry 84 of List-I - States have
exclusive-Privilege to legislate on intoxicating liquor or alcoholic liquor for
human consumption. F

The appellants were holding licence to manufacture and use in-
dustrial alcohol as the main raw material for its products. State legislature
vide Notification No. 25/licence/Part-3 dated 18-5-1990 imposed a licence
fee on the distilleries, holding licence for denaturation of spirit, at the rate G
of 7 paise per litre.

Appellants filed a writ petition challenging the said Notification on
the grounds that State has no power to legislate in respect of industrial
alcohol or to levy taxes in respect thereof and that the levy being not based
on quid pro quo. High Court rejected the contentions of the appellant and H
403
404 SUPREME COURT REPORTS [1997] 1 S.C.R.
A dismissed the writ petitions. Hence. these appeals by way of special leave.
Appellants contended that as this court held in Synthetic and Chemi-
cals Ltd. v. State of U.P., JT 1989 (4) SC 267 that the rectified spirit being
industrial alcohol not fit for human consumption, the State Legislature
has no power to make law with r'l!spect to it or to charge licence fee or levy
B any other impost. It was further contended that industrial alcohol is within
the exclusive domain of the Parliament by virtue of the declaration made
by it in Sec 2 of the Industries Development and Regulation Act, 1956 and
by addition of Item 26 in the schedule of the Act, and that Entry 8 or 51
of List-II of the Seventh Schedule to the Constitution cannot support the
C Notification. Entry 33 of List-Ilil also could not sustain it as the field was
occupied by the provisions of Section 18-G of the IDR Act.

Dismissing the appeal, this Court

HELD: 1.1. Rectified spirit is, however, toxic and unfit for human
D consumption but could be usecl as country liquor if diluted with water. To
prevent such misuse of the rectified spirit, produced for industrial use, it
·is required to be denatured by adding denaturants, which make the spirit
unpalatable and nauseating. Itr is meant to prevent misuse of non- potable
alcohol for human consumption. A careful reading of the judgment of
E Synthetic Chemical case, this Court has enumerated various areas relating
to industrial alcohol in which State could legislate and make law, including
preventing its misuse. [407-C-D; 414-B-C; H]

1.2. As the power under Sec. 18G, IDR Act is concerned, can be
exercised only so far as permitted by Sub-Sec.(1) viz., for securing thr.
F equitable distribution and availability at fair price of any article or class
of artides relatable to any scheduled industry. To this extent the State
Legislature cannot make any law but in other respects, the field is still
open to the State Legislatmre. So, the impugned Notification issued to
ensure. that rectified spirit sought to be used for industrial purposes was
G not diverted for obtaining country liquor or other form of potable liquor
was thus, justified under Ent.ry 6 List· II-Public health: and Entry 8 List-II
- Possession and sale of intoxication liquor. [412-A·B]

1.3. The State under Entries 8 and 51 of List-II read with Entry 84
of List-I have exclusive privilege to legislate on intoxicating liquor or
H alcoholic liquor for human consumption. Hence, so long as any alcoholic
VAM ORGANIC CHEMICALS v. STATE 405

preparation can be diverted to human consumption, the State shall have A
the power to legislate as also to impose taxes. etc.. In this view, denatura-
tion of spirit is not only an obligation on the State but also within the
competence of the States to enforce. [415-A-B]

Shri Bileshwar Khand Udyog Khedut Sahakmi Mandali Ltd. v. State of
Gujarat, [1992] 1 SCC 42 : [1992] 1 SCR 391; Gujchem Distillers India Ltd. B
v. State of Gujarat, [1992] 1 SCC 339 : [1992] 1 SCR 675 and State of A.P.
( v. McDowell & Co. Ltd., [1996] 3 SCC 709 : JT (1996) 3 SC 679, relied on ..

Synthetics and Chemicals Ltd. v. State of U. P., [1990] (1) SCC 109:
[1989] Supp. 1 SCR 623, discussed and explained. C
2. There is a distinction between fees charged for licences i.e.
regulatory fees and the fees for services rendered as compensatory fees. In
the case of regulatory fees, like the licence fees, existence of quid pro quo
is not necessary although the fee imposed must not be, in the circumstan-
ces of the case, excessive. Keeping in view the quantum and the nature of D
the work involved in supervising the process of denaturation and the
consequent expenses incurred by the State, the fee of 7 paise per litre was
reasonable and proper. [418-C-D; H; 419-A-B]

Corporation of Calcutta v. Liberty Cinema, AIR (1965) SC 1107 : E
[1965] 2 SCR 447, referred to.

Georg Walkem Shannon v. Lower Mainland Dairy Products Board,
1938 AC 708 : AIR (1939) PC 36, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 230 of p
" 1997 Etc.

From the Judgment and Order dated 9.9.91 of the Allahabad High
Court in C.M.W.P. No. 16782 of 1990.

D.A. Dave, Ms. Manik Karanjawala, Bhaskar Pradhan and P.K. G
Mullick for the Appellants.

M.K. Banerjee, Attorney General of India, R.B. Misra and Ms. Nalin
Thirpathi for the Respondents.

The Judgment of the Court was delivered by H
406 SUPREME COURT REPORTS [1997) 1 S.C.R.
A AHMADI, CJ. Leave gra1llted.

These two appeals are filed against the judgment of the High Court
of Allahabad dated 9.9.1991 whereby the writ petitions filed by the appel-
lants herein challenging the notification No. 25/Licence/Part-3 dated
18.5.1990 issued by the Excise Commissioner, Uttar Pradesh, were dis-
B missed. The impugned Notification dated 18.5.1990 was issued in exercise
of powers conferred by Section 41 of the U .P. Excise Act, 1910 (hereinafter
called 'the Act') with the prior approval of the State Government. By the
said Notification certain amendments were made in the Rules published
with Notification No. 423-Five I 284/B, dated 26th september 1910. Section
C 41 of the Act gives power to the excise Commissioner to make Rules, Inter
alia, for regulating the manufacture, supply, storage or sale of any in-
toxicant; for regulating deposit and removal of any intoxicant and prescrib-
ing the scale of fees or manner of fixing the fees payable for licence, permit
or pass, including for the grant of any exclusive or other privilege under
D Sections 24 and 24A of the saiq Act. The earlier Rule 2 was substituted by
a new Rule 2 entitled "denaturation of Spirit". The amended rule provides
for a new licence for denaturation of spirit in a prescribed form to be
issued by the Collector to all distilleries situated within his district holding
licence PD-1 or PD-2 and persons holding licences FL-16, FL-39, FL-40
and FL-41 to denature the spirit. It further prescribed that the distilleries
E mentioned above and holding licence for denaturation of spirit shall be
liable to pay a denaturation fee at the rate of 7 paise per litre in advance.
The appellants Varn Organic Chemicals Limited are manufacturing vinyl
acetate monomer, a basic organic chemical for which industrial alcohol is /
<(
the main feed stock. The industrial alcohol is being produced in the/
F distillery of the appellants and according to the appellants the entire.I
industrial alcohol produced is denatured as per the method approved b{,,
the State Excise Authorities and is being used in their factory for manufac-
turing vinyl acetate monomer. The other appellants, viz., India Glycols
Limited and another, are manufacturing Monoethylene Glycol and its
products Diethylene glycol and heavy glycol. One part of the factory of
G these appellants is being used for manufacturing ethyl alcohol produced by
them for being captively consumed.

The appellants hold licences in the form of FL-39 to enable them to
use the industrial alcohol as the main raw material for their product. They
H were obliged to take out licence in the form of DS- 1 as prescribed in the
VAMORGANICCHEMICALSv. STATE [AHMADI, CJ.] 407

impugned Notification and pay a licence fee at the rate of 7 paise per litre A
with effect from 2nd June, 1990. The Notification is challenged on two
grounds, namely, that the State of Uttar Pradesh has no power to legislate
in respect of industrial alcohol or to levy taxes in respect thereof and
further that the levy being not based on quid pro quo was otherwise bad.
The State of Uttar Pradesh contested the writ petitions. By the impugned
B
judgment, the High Court rejected all the contentions of the appellants and
dismissed the writ petitions. Hence these appeals by special leave.
-f
Before proceeding further, it will be proper to understand the dif-
ference between industrial alcohol, denatured spirit and potable liquor.
Ethyl alcohol is rectified spirit of 95% v/v in strength. Rectified spirit is C
highly toxic and unfit for human consumption. However, rectified spirit
diluted with water is country liquor. Rectified spirit, as it is, can be used
for manufacture of various other products like chemicals, etc. Rectified
spirit, produced for industrial use is required by a Notification issued under
the Act to be denatured in order to prevent the spirit from being directed D
to human consumption. Rectified spirit is denatured by adding denaturants
which make the spirit unpalatable and nauseating. As such rectified spirit
can be converted to potable liquor but once denatured it can be used only
as industrial alcohol. The process of denaturation described by the respon-
dent is narrated by the 'High Court in the following words :
E
\ "Denaturation of rectified spirit is a highly technical process. Every
\ drum/lot/batch has to be tested by Chief Development Officer at
the Excise Head quarters laboratory so as to ensure that the same
is according to the prescribed specification before they are allowed
to be used for denaturing the rectified spirit. After they are F
properly tested, the denaturants have to be separately stored under
lock and key of the officer-in-charge of the distillery, and measured
quantities are pumped into denaturation vats at the time of
denaturation. The process of mixing.goes on for several hours. The
resultant mixture is denatured spirit or specially denatured spirit,
as the case may be. After denaturing, it is again tested to find out G
whether it has been properly denatured or not. The Excise D"part-
ment is obliged to, and does maintain laboratory for this purpose
at the Head Quarters of the Excise Commissioner. There is a Chief
Development Officer, assistant by four Assistant Alcohol Tech-
nologists and a large number of supporting staff apart from ap- H
408 SUPREME COURT REPORTS [1997] 1 S.C.R.

A paratus and other equipment. Denaturation takes place under the
close supervision of the Excise Officials in accordance with the
provisions of rule 785 of the U.P. Excise Manual, volume I."

The first contention raised before the High Court was that rectified
spirit being industrial alcohol as held by the Supreme Court in Synthetic
B and Chemicals Ltd. v. State of U.P., (1990) 1 SCC 109 and being not fit for
human consumption, the State Legislature has no power to make a law with
respect to it or to charge licence fee or levy any other impost. It was
submitted by the petitioners that !industrial alcohol is within the exclusive
domain of the Parliament by virtue of declaration made by it in Section 2
C of the Industries Development & Regulations Act, 1956 (hereinafter
referred to as "the ID R Act") and the addition of Item 26 in the Schedule
to the Act. Further, it was submitted that Entry 8 or 51 of List II of the
Seventh Schedule to the Consti_tution cannot support the impugned
Notification. Entry 33 of List III, the petitioners submitted, could not
sustain it as the field was occupied by the provisions of Section 18G of the
D IDR Act.

So far as List II is concerned, the impugned judgment refers to
Entties 6, S, 24, 51 and 66 to conclude that the Notification is covered by
Entries 6 & 8. The said entries are reproduced below :
E
"6. Public health and sanitation; hospitals and dispensaries.

8. · Intoxicating liquors, that it to say, the pro::luction, manufac-
. . ture, possession, transport, purchase and sale of intoxicating
F liquors.

24. Industries subject to the provisions of Entries 7* and 52** of
List I.

· 51. Duties of excise on the following goods manufactured or
G produced in the State and countervailing duties at the same
or lower rates on similar goods manufactured or produced
elsewhere in India : -
7. Industries declared by Parliament by law to be necessary for the purpose of defence
or for the prosecution of war.
H •• 52. Quoted in the following page.
V AM ORGANIC CHEMICALS v. STATE [AHMADI, O.J ' 409
(a) Alcoholic liquors for human consumption; A
(b) Opium, Indian hemp and other narcotic drugs and nar-
cotics;

but not including medicinal and toilet preparations contammg
alcohol or any substance included in sub-paragraph (b) of this B
entry.

66. Fees in respect of any of the matters in this List, but not
including fees taken in any court."

Production, possession, storage, and distribution of country liquor,IMFLs, C
wines etc. are fully controlled by the State. (See Section 24-B, U.P. Excise
Act). The U.P. Excise Act & Rules made thereunder prescribe a system
of licensing for producing rectified spirit, for obtaining country liquor, etc.,
as well as for possession, storage and trade in these products. The licensing
has the twin objective, the High Court points out, of raising revenue and D
regulating trade in the noxious goods. The High Coiirt finds the Entries 6
& 8 of List-II as providing the field for legislation and consequent licensing
for denaturation of spirit and Entry 51 as providing the scope for levy of
duties.

Coming to List-III, the relevant Entry is 33 : E
"33. Trade and commerce in, and the production, supply and
distribution of,. -

(a) the products of any industry where the control of such
,.... industry by the Union is declared by Parliament by law F
to be expedient in the public interest, and imported
goods of the same kind as such. products;
....
(b) foodstuffs, including edible oilseeds and oils;

(c) cattle fodder, including oilcakes and other con- G
centrates;

(d) raw cotton, whether ginned or unginned, and cotton
seed; and

(e) raw jute." H
410 SUPREME COURT REPORTS (1997] 1 S.C.R.
A A similar Entry is 52 in List-I :

"52. Industries, the control of which by the Union is declared..by
Parliament by law to be expedient in the public interest.

A declaration is made by Section 2 of the IDR Act that "it is expedient in
B the public interest that the Union should take under its control the in-
dustries specified in the First Schedule."

Item 26 of the 1st Schedule reads :

"26. Fermentation Industries
c
1. Alcohol

2. Other products of fermentation industries.

D Recall Entry'24 of List-II: 't
. "24. Industries subject to the provision of (Entries 7 and 52) of List
I."

The impugned judgment now proceeds to examine how much of the field
E is occupied by the IDR Act so that the area available to the State Legis-
lature can be ascertained.

Section 18G empowers tlb.e Central Government to provide for
regulating the supply and distribution and trade and commerce in any
article or .class of articles relatable to any scheduled industry insofar as it
F appears to it to be necessary or. expedient for securing the equitable
distribution and availability at fair price. Sub-section (2) specifies the
various provisions that can be made under sub-section (1) :

"18-G. Power to control supply, distribution, price, etc. of certain
articles. - (1) the Central Government so far as it appears to it to
t
G be necessary or expedient for securing the equitable distribution, and
availability at fair prices of any article or class of articles relatable to
any schedule industry, may notwithstanding anything contained in
any other provision of this Act, by notified order, provide, for
regulating the supply and distribution thereof and trade and com-
H merce therein.
VAM ORGANIC CHEMICALS v. STATE [AHMADI, CJ.] 411

~ (2). Without prejudice to the generality of the powers conferred A
by sub-section (1) a notified order made thereunder may provide-

(a) For controlling the prices at which any such article or class
thereof may be bought or sold;

(b) For regulating by licences, permits, or otherwise, the distribu- B
tion, transport disposal, acquisition, possession, use or consump-
tion of any such article or class thereof;
-f
(c) For prohibiting the withholding from sale of any such article
or class thereof ordinarily kept for sale;
c
' (d) requiring any person manufacturing producing or holding in
stock such articles or class thereof to sell the whole or the part of
the articles so manufactured or produced during a specified period
or to sell the whole or a part of the articles so held in stock to
such person or class or persons and in such circumstances as may D
-~ be specified in the order;

(e) For regulating or prohibiting any class or commercial or
financial transaction relating to the such article or class thereof
which in the opinion of the authority making the order are, or if
unregulated are likely to be detrimental to public interest; E
(t) For requiring persons engage_d in the distribution and trade
and commerce in any such article or class thereof to mark the
articles exposed of intended for sale with the sale price or to exhibit
at some easily accessible place on the premises the price - lists of
~
articles held for sale and also to similarly exhibit on the first day
F
of every month, at such other time as may be prescribed, a
statement of the total quantities of any such articles in stock;

(g) for collecting any information or statistics with a view to
regulation or prohibiting any of the aforesaid matters; and G
(h) for any incidental or supplementary matters, .including, in
particular, the grant or issue of licences, permits or other docu~
-:<
ments and charging of fees therefor." ·

(Emphasis supplied) H
412 SUPREME COURT REPORTS (1997] 1 S.C.R.
A Thus, the power under Section 18G can be exercised only so far as is
permitted by sub-section (1) viz., for securing the equitable distribution and
availability at fair price of any article or class of articles relatable to any
scheduled industry. To this Extrnt the State Legislature cannot make any
law. The High Court concludes that in other respects the field is still open
to the State Legislature. The High Court goes on to say that the impugned
B Notification is issued to ensure that rectified spirit sought to be used for
industrial purposes is not diverted for obtaining country liquor or other
forms of potable liquor and that it is not concerned with equitable distribu-
tion and availability at fair price of either rectified spirit or the denatured
sprit. The Notification was, thus, justified under Entry 6 of List-II public
C health; and Entry 8 of List-II - Possession and sale of intoxicating liquors.

This Court dealt with the question of legislative competence of the
State to impose tax or levy on industrial alcohol in the case of Synthetic
Chemicals v. State of U.P., [1990] 1 SCC 109 = [1989] Supp. 1 SCR 623
D and ruled in the negative. The High Court took the view that the distinction
between ethyl alcohol/rectified spirit as such and denatured spirit was not
in issue, nor was it considered in that judgment and held that this Court
cannot be said to have ruled that every rectified spirit/ethyl alcohol is
industrial alcohol. The High Court reiterated that once denatured, the
alcohol becomes exclusively industrial alcohol since it cannot be i.Jsed for
E obtaining country liquor or for manufacturing IMFLs and said that it is to
ensure that ethyl alcohol meant: for industrial use is not misused or diverted
for human consumption that impugned regulation is provided for by the
State and further that the regulation being part of general regulation of the
trade in alcohol in the irrterest of public health is relatable to Entries 6 &
8 of List-II.
F
The second part of the case relates to the question of quid pro quo
between the services rendered by the State and the rate of fee charged.
According to the petitioners/appellants, the fee charged was excessive and
hence bad. The High Court pointed to the distinction between the
G regulatory fee and compensatory fee. It opined that the licence fee imposed
for regulatory purposes may not carry with it any service rendered, but that
such licence fee must be reasonable. Further, the High Court said, it would
be appropriate to look to the expenditure which the State incurs for
administering the regulation and if there is a broad co-relation between the
H expenditure which the State incurs and the fees charged, the fees could be
V AM ORGANIC CHEMICALS v. STATE [AHMADI, O.J 413

k sustained as reasonable. It also referred to the counter-affidavit of the State A
·~ to conclude that a good number of officers and employees are engaged in
managing the laboratories besides the staff which is posted at the distill-
eries and so the rate of 7 paise per litre was in order.

In these appeals the appellants reiterate that this Court by its 7-Judge
Bench decision in Synthetic Chemicals (supra) has expressly ruled against
B
legislative competence of the State so far as ethyl alcohol/rectified spirit is
-f concerned. Further they say that even if the State is left with regulatory
power to prevent misuse of industrial alcohol for potable purposes, such
power did not include power to levy any impost. Further, the appellants
say that denaturation is a statutory duty imposed by a Notification under c
the U.P. Excise Act and no service by the State being provided for the
same, no fee could be charged and in any case even if the State has to incur
any expenses for enforcement of the requirement of denaturation, there is
no quid pro quo between the expenses incurred and the fees charged.
D
We may note that the term 'industrial alcohol' is not used in any of
the Lists in the Seventh Schedule of the Constitution. All the entries quoted
in the earlier part of the judgment have to be read with Article 248 of the
Constitution which specifies residuary powers of the Union :

"248. Residuary powers of legislation. - (1) Parliament has exclusive E
power to make any law with respect to _any matter not enumerated
in the Concurrent List or State List.

(2) Such power shall include the power of making any law imposing
a tax not mentioned in either of those Lists."
F
This is reflected in Entry 97 of List-I :

"97. Any other matter not enumerated in List II or List III including
any tax not mentioned in either of those Lists."

Whether alcoholic liquors other than"alcoholic liquors for human con- G
sumption" or "intoxicating liquor" was a State subject or a Union Subject
should be the real controversy. It is with a view to describing this kind of
..,.
liquor that the term 'industrial alcohol' is used. After an analysis of all the
provisions of law giving the Union Parliament and the State Legislature
jurisdiction to legislate on alcohol, this Court in the Synthetic Chemical H
414 SUPREME COURT REPORTS (1997] 1 S.C.R.
A case (supra) held that the impugned Notifications imposing certain fees as
vend fee or transport fee etc., were held to be within the legislative
competence of the State. A careful reading of that judgment shows that
the Court was fully aware of the fact that rectified spirit was the ingredient
for intoxicating liquor or alcoholic liquor for human consumption although
rectified spirit/ethyl alcohol as well as denatured spirit are referred to as
B
'industrial alcohol' in that judgment. This Court did not hold that the State
will have no power whatsoever in rehtion to "industrial alcohol''. In fact, in
the judgment itself, the Court has enumerated the various areas relating to
industrial alcohol in which the State could still legislate or make rules. The
following part of the judgment can be read with profit.
c "The position with regard to the control of alcohol industry has
undergone material and significant change after the amendment
of 1956 to the IDR ACT. After the amendment, the state is left
with only the following powers to legislate in respect of alcohol :

D (a) it may pass any legislation in the nature of prohibition of
potable liquor referable to entry 6 of list II and regulating ~

powers.

(b) it may lay down regulations to ensure that non- potable
alcohol is not diverted and misused as a substitute for potable
E alcohol.

(c) the state may charge excise duty on potable alcohol and sales
tax under entry 52 of list II. However, sales tax cannot be
charged on industrial alcohol in the present case, because
under the Ethyl Alcohol (Price Control) orders, sales tax >-
F
cannot be charged by the state on industrial alcohol.

(d) however, in case State is rendering any service, as distinct
from its claim of so-called grant of privilege, it may charge
fees based on quid pro quo. See in this connection, the
G observations of India Mica's case supra)."

[1989] Supp. 1 SCR 623 (681-682).
'T
Denaturation of spirit meant for industrial use is meant to prevent misuse
of non-potable alcohol for human consumption and as such specifically
H mentioned by the Court to be within the legislative competence of the
VAM ORGANIC CHEMICALS v. STATE [AHMADI, CT.] 415

State. A

It is to be noticed that the States under Entries 8 and 51 of List-II
read with Entry 84 of List-I have exclusive privilege to legislate on in-
toxicating liquor or alcoholic liquor for human consumption. Hence, so
long as any alcoholic preparation can be diverted to human consumption,
the States shall have the power to legislate as also to impose taxes, etc. In
B
this view, denaturation of spirit is not only an obligation on the States but
also within the competence of the States to enforce.

This court had occasion to deal with the same entries in the three
Lists and their effect when confronted with the IDR Act in the case of Slui c
Bileswar Khand Udyog Khedut Sahakmi Mandali Ltd. v. State of Gujarat &
Anr., (1992) 1 S.C.R. 391. In that case, the matter under challenge was the
validity of demand under Section 58-A of the Bombay Prohibition Act for
maintenance of the excis-e staff for supervision of the manufacture of
industrial alcohol which was assailed for Jack of.legislative competence of D
the State. The appellant in that case urged that even if State's power to
supervise production of alcohol is conceded, the State could not be said to
have the power to impose any levy to meet the cost of supervision. The
Court observed :

"According to learned counsel since the entire judgment of the E
High Court proceeded on privilege theory it cannot withstand the
principle laid down in Synthetic & Chemical's case. Levy as a fee
under Entry 8 of List II of VTith Schedule or excise duty under
Entry 51 are different than cost of supervision charged under
section 58A. The former has to stand the test of levy; being in F
acwrdanct with law on power derived from one of the constitu-
tional entries. Since Synthetic & Chemical's case finally brought
purview of either Entry 8 or 51 of List II of VIIth Schedule of the
competency of the State to frame any legislation to levy any ta'{ or
duty is excluded. But by that a provision enacted by the State for
supervision which is squarely covered under Entry 33 of the con~ G
current list which deals with production, supply and distribution
which includes regulation cannot be assailed. The Bench in Syn-
thetic & Chemical's 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 regula- H
416 SUPREME COURT REPORTS (1997] 1 S.C.R.

A tions 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 58A. In paragraph 88 of
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 chat case but that did not effect any imposition
B of fee 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 appellant."

The judgment was followed in a later case raising the same questions and
C challenging the validity of :Section 58-A of the Bombay Prohibition Act,
namely, Gujchem Distillers J'ndia Ltd. v. State of Gujarat and Anr., (1992] 1
S.C.R. 675. On a proper a]ppreciation of the legal situation, the fee of 7
paise per litre has to be seen as a part of the regulatory measure, namely,
denaturation of spirit and supervision of the said process.

D More recently the effect of interaction of entries 8 and 24 in List II,
entry 52 of List I of the Seventh Schedule and entry 26 of the First Schedule
of the IDR Act came to be considered in the case of State of A.P. & Ors.
v. Mcdowell & Co. & Ors. Etc reported in JT 1996 (3) SC 679. The State
of Andhra Pradesh prohibited the manufacture of liquor by an amendment
E in the Andhra Pradesh Prnhibition Act, 1995. 'Liquor' in the Act was
defined as under :

"(7). 'Liquor' includes, -

(a) spirit of wine,. wine, bear and every liquid consisting of or
F containing alcohol including Indian Liquor and Foreign liquor,

(b) any other intoxicating substance which the Government may
by notification, declare to be liquor for the purposes of this Act,

but does not include toddy, denatured spirits, methylated spirits
G and rectified spirits;"

We may also notice Section 7A. By that Section manufacture of liquor
came to be prohibited.

M/s. McDowell & Co., manufactures of intoxicating liquors chal-
H lenged the constitutional validity of the Act by which the Prohibition Act
VAM ORGANIC CHEMICALS v. STATE [AHMADI, CJ.] 417

was amended to include Section 7-A. One of the grounds of challenge was A
lack of legislative competence in view of entry 26 in the First Schedule of
the ID R Act which according to the writ petitioners, vested the control of
alcohol industries exclusively in the Union and denuded the State legisla-
ture of its power to licence or regulate the manufacture of liquor. This
submission was based on the fact that fermentation industries were in-
B
cluded in the Schedule of the IDR Act and hence the State was denuded
of its power to licence and regulate manufacture of liquor. Entry 26 reads
"Fermentation Industries; (1) Alcohol; (2) other products of fermentation
industries". It was argued that after the amendment the control and regula-
tion of such industries and their product fell within the exclusive province
of the Union and hence the State lost its competence to grant, refuse or C
renew the licences. After an analysis of all the relevant provisions of the
law the Court concluded as under :

"(W)e must-first carve out the respective fields of Entry 24 and
Entry 8 in List II. Entry 24 is a general entry relating to industries D
whereas Entry 8 is a specific and special entry relating inter alia
to industries engaged in production and manufacture of intoxicat-
ing liquors. Applying the well-known rule of interpret_ation ap-
plicable to such a situation (special excludes the general), we must
hold that the industries engaged in production and manufacture
of intoxicating liquors do not fall within Entry 24 but do fall within E
Entry 8. This was the position at the commencement of the Con-
stitution and this is the position today as well. Once this is so, the
making of a declaration by the Parliament as contemplated by .
Entry 52 of List I "does not have the effect of transferring or
transplanting, as it may be called, the industries engaged in produc- F
tion and manufacture of intoxicating liquors from the State List to
Union List. As a matter of fact, the. Parliament cannot take over
the control of industries engaged in the production and manufac-
ture of intoxicating liquors hy making a declaration under Entry
52 of List-I, since the said entry governs only Entry 24 in List II
but not Entry 8 in List II." G

It was reiterated in the later part of the judgment as under :

"It follows from the above discussion that the power to make a law
with respect to manufacture and production and its prohibition H
418 SUPREME COURT REPORTS [1997] 1 S.C.R.

A (among other matters mentioned in Entry 8 in List-II) belongs
exclusively to the State Legislatures. Item 26 in the First Schedule
to the l.D.R. Act must be read subject to Entry 8 - and for that
matter, Entry 6 - in List -II. So read, the said item does not and
cannot, d~al with manufacture, production of intoxicating liquors.
All the petitioners before us are engaged in the manufacture of
B intoxicating liquors. The State Legislature is, therefore, perfectly
competent to make a law prohibiting their manufacture and
production - in addition to their sale, consumption, possession
and transport - with reference to Entries 8 and 6 in List-II of the
Seventh Schedule to the Constitution read with Article 47 th.!reof."
c
The High Court in the impugned judgment has drawn a distinction
between fees charged for licence, i.e., regulatory fees and the fees for
services rendered as compensatory fees. The distinction pointed out by the
High Court can be seen in clause (2) of Article 110 : .

D "110. (2) - A bill shall not be deemed to be a Money Bill by reason
only that it provides for the imposition of fines or other pecuniary
penalties, or for the demand or payment of fees for licences or
fees for services rendered, or by reason that it provides for the
imposition, abolition, remission, alteration or regulation of any tax
E by any local authority or body for local purposes."

The High Court has quoted from this Court's decision in Corporation of
Calcutta v. Liberty Cinema, AIR (1965) SC 1107 = [1965] 2 S.C.R. 477,
which was based on a Privy Council judgment in Shennon v. Lower Main-
land Dairy Products Board, (1938) AC 708 =AIR (1939) PC 36. This Court
F said in the C01poration of Calcutta v. Liberty Cinema (supra) :

"In fact, in our Constitution fee for licence and fee for services
rendered are contemplated as different kinds of le\y. The former
is not intended to be a fee for services rendered. This is apparent
from a consideration of Article 110(2) and Article 199(2) where
G
both expressions are used indicating thereby that they are not the
same."

The High Court has taken the view that in the case of regulatory fees, like
the licence fees, existence of quid pro quo is not necessary although the fee
H imposed must not be, in the circumstances of the case,, excessive. The High
VAM ORGANIC CHEMICALS v. STATE [AHMADI, CJ:] 419

+ . Court further held that keeping in view the quantum and nature of the A
work involved in supervising the process of denaturation and the conse-
quent expenses incurred by the Stat~, the fee of 7 paise per litre was
reasonable and proper. We see no reason to differ with this view of the
High Court.

In view of the foregoing, the appeals are dismissed. No costs. B
B.K.S. Appeals are dismissed,