Supreme Court Upholds High Court Decision Quashing Excise Duty Demands on Wastage of High-Strength Spirit and Pipeline Loss in Alcohol Manufacturing. The Court held that excise duty under Entry 51 of List II of the Seventh Schedule to the Constitution cannot be levied on raw material or input still in process of being rendered fit for human consumption.

Case Note & Summary

The State of Uttar Pradesh filed appeals before the Supreme Court against judgments and orders of the Allahabad High Court dated 9 March 1979 and 11 October 1979, which allowed writ petitions filed by manufacturers of Indian made foreign liquor and quashed orders demanding excise duty. The High Court categorized the demands into four groups: Group A concerned demands for excise duty on wastage of Indian made foreign liquor exported outside the State; Group B related to demands on wastage during transportation in containers of high strength spirit of 80 to 85 per cent from distillery to warehouse; Group C related to demand of excise duty on obscuration; and Group D related to excise duty on pipeline wastage. The High Court held that for Groups B, C and D, the stage at which the State could levy excise duty had not been reached. The issue relating to Group A was subsequently covered in favour of the State by the Supreme Court's decision in State of U.P. and Ors. v. Delhi Cloth Mills and Anr., (1991) 1 SCC 454, which was not disputed by the manufacturers. The State contended before the Supreme Court that it was competent to levy excise duty on liquor for human consumption, that the content of liquor in the Indian made foreign liquor was exigible, and therefore wastage of liquor from the time the process of manufacture began was exigible to excise duty. In the alternative, the State argued that if only the Indian made foreign liquor as the ultimate beverage was exigible, the process of determining wastage and levying excise duty was only regulatory and permissible. The manufacturers supported the view taken by the High Court. The Supreme Court examined Entry 51 of List II of the Seventh Schedule to the Constitution, which empowers the State to levy excise duty on alcoholic liquors for human consumption, and Section 3(22-a) of the U.P. Excise Act, 1910, which defines 'excisable article' as any alcoholic liquor for human consumption or any intoxicating drug. The Court also referred to Section 28 of the U.P. Excise Act, 1910, which imposes duty on excisable articles imported, exported, transported, manufactured, cultivated or collected. The Court relied on the seven-judge bench decision in Synthetics and Chemicals Ltd. and Ors. v. State of U.P. and Ors., (1990) 1 SCC 109, which held that the expression 'alcoholic liquors for human consumption' means 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, and that industrial alcohol, which is ethyl alcohol of 95 per cent strength, is not an alcoholic liquor for human consumption but a raw material or input after processing and substantial dilution in the production of whisky, gin, country liquor, etc. Applying that principle, the Court observed that what the State sought to levy excise duty upon in Group B cases was the wastage of liquor after distillation but before dilution, and in Group D cases, the pipeline loss of liquor during the process of manufacture before dilution. The Court held that this was not alcoholic liquor for human consumption but raw material or input still in process of being rendered fit for consumption by human beings, and the State was not empowered to levy excise duty on such raw material or input. The judgment excerpt concludes with the observation that the measure of excise duty upon alcohol. The final operative direction is not fully reproduced in the available text, but the legal principle is clear that the State cannot levy excise duty on raw material or input before it becomes alcoholic liquor for human consumption.

Headnote

Issue of Consideration

Final Decision

The Supreme Court held that what the State sought to levy excise duty upon in Group B (wastage after distillation but before dilution) and Group D (pipeline loss before dilution) was not alcoholic liquor for human consumption but raw material or input still in process of being rendered fit for consumption by human beings, and the State is not empowered to levy excise duty on such raw material or input. Group A was covered in favour of State by Delhi Cloth Mills. The final operative order for Group C is not explicitly stated in the available text, but the same reasoning applies. The Court relied on Synthetics and Chemicals and the constitutional entry to reject the State's contention.

Law Points