Case Note & Summary
The dispute arose from the levy of countervailing duty on foreign liquor imported into the State of Orissa. The appellant, Kalyani Stores, held a retail vendor licence for all types of foreign liquor under the Bihar and Orissa Excise Act, 1915. Under a notification issued in 1937 under Section 27 of the Act, a duty of Rs.40 per L.P. gallon was imposed on foreign liquor of Indian manufacture imported into Orissa. For the year April 1, 1960 to March 31, 1961, duty was levied at that rate. On March 31, 1961, the Board of Revenue enhanced the duty from Rs.40 to Rs.70 per L.P. gallon with effect from April 1, 1961. The appellant's licence was renewed, and on November 14, 1961, the Sub-Inspector of Excise demanded payment of the difference at Rs.30 per gallon on stocks held on April 1, 1961 and duty at Rs.70 per gallon on fresh stocks received thereafter. The appellant challenged the legality of the enhanced levy by a writ petition under Article 226 of the Constitution before the Orissa High Court. The High Court dismissed the petition on October 29, 1962, holding that the State Legislature had power under Entry 51 List II to levy countervailing duties at the same or lower rates. The appellant then appealed to the Supreme Court by special leave. The core legal issues were whether countervailing duty could be levied when no similar foreign liquor was manufactured within the State, whether the enhancement violated Articles 301, 303 and 304, and whether the pre-Constitution notification constituted existing law protected by Articles 305 and 372. The appellant argued that countervailing duty could only be imposed to equalise the burden on imported goods with locally manufactured goods, and since there was no distillery in Orissa manufacturing foreign liquor, the levy was without authority. The State contended that under Entry 51 List II the State Legislature had plenary power to levy excise and countervailing duties, and the original notification was saved as existing law. The majority of the Supreme Court held that countervailing duty under Entry 51 List II is meant to equalise the burden on imported alcoholic liquors with excise duty on locally manufactured liquors, and therefore such duty can only be levied if similar goods are actually produced or manufactured in the State. Since no foreign liquor was manufactured in Orissa at the material time, the enhanced duty could not be justified under Article 304(a), and the notification of March 31, 1961 enhancing the duty by Rs.30 per gallon infringed the freedom of trade guaranteed by Article 301. However, the court held that the State could continue to levy duty at the rate of Rs.40 per gallon prescribed by the 1937 notification because that notification, combined with Section 27 of the Bihar and Orissa Excise Act, constituted an existing law protected by Articles 305 and 372 of the Constitution. The court distinguished the Bangalore W.C. & S Mills Co. case. Justice Hidayatullah dissented, holding that the Act itself was saved and the new notification was valid as it derived force from Section 27. Ultimately, the Supreme Court allowed the appeal in part, declaring the enhancement invalid but upholding the old levy. The decision clarified the scope of countervailing duty and the interplay between Articles 301, 304 and 305 of the Constitution in the context of state excise laws.
Headnote
A) Constitutional Law - Freedom of Trade and Commerce - Restriction on inter-State trade - Constitution of India, Article 301 and Article 304(a) - The notification dated March 31, 1961 enhancing duty on foreign liquor by Rs.30 per gallon was challenged as violating Article 301. The court held that any restriction on freedom of trade under Article 301 must be justified under Article 304, and since no foreign liquor was produced or manufactured within the State, the protection of Article 304 was not available, making the enhancement invalid. Held that the enhancement infringed Article 301 (Paras 872, 874). B) Excise Law - Countervailing Duty - Meaning and Scope - Constitution of India, Entry 51 List II of Seventh Schedule - Countervailing duty is meant to counterbalance excise duty on locally manufactured goods, and can be levied only when similar goods are actually produced or manufactured in the State and excise duties are being levied on them. The court reasoned that because no foreign liquor was manufactured in Orissa at the material time, no countervailing duty could be imposed under Entry 51 List II for the enhanced amount. Held that countervailing duties require local production for equalization (Paras 869-870). C) Constitutional Law - Existing Laws - Protection under Articles 305 and 372 - Constitution of India, Articles 305 and 372; Bihar & Orissa Excise Act, 1915, Section 27 - The State could continue to levy duty at the rate of Rs.40 per gallon prescribed by the 1937 notification even after the Constitution because the combination of Section 27 and the 1937 notification constituted an existing law protected by Articles 305 and 372. The court held that existing law within Article 305 included the provision authorizing the State Government to issue notifications and the notification already issued, and thus the old levy was valid. Held that the old levy was saved as existing law (Paras 872-873). D) Constitutional Law - Post-Constitution Legislation - Validity of New Notification - Constitution of India, Articles 301, 304, 305; Bihar & Orissa Excise Act, 1915, Section 27 - The notification of March 1961, which enhanced duty by Rs.30 and altered the existing law, could be valid only if it complied with constitutional requirements. Because it discriminated against imported goods without corresponding local manufacture, it failed. Held that the enhancement was invalid (Paras 872-874). E) Constitutional Law - Dissenting Opinion - Saving of Excise Act - Constitution of India, Articles 301, 304(a), 305, 372; Bihar & Orissa Excise Act, 1915, Section 27 - The dissenting judge held that the Bihar and Orissa Excise Act, 1915 was valid under the Government of India Act, 1935 and protected by Article 372, and Section 27 itself was saved, so any notification under it, including the 1961 enhancement, was valid. Held that Article 304(a) was enabling and prospective, not a ban, and the Act was sustained independently under Articles 305 and 372 (Paras 883, 893).
Issue of Consideration
Whether countervailing duty can be levied on imported foreign liquor when no similar liquor is manufactured in the State; whether the enhancement of duty by the notification dated March 31, 1961 violates Articles 301, 303 and 304 of the Constitution; whether the pre-Constitution notification of 1937 and Section 27 of the Bihar and Orissa Excise Act constitute existing law protected under Articles 305 and 372
Final Decision
The Supreme Court by majority allowed the appeal in part, holding that the notification dated March 31, 1961 enhancing the duty by Rs.30 per gallon was invalid as infringing Article 301 of the Constitution, but that the State could continue to levy duty at the rate of Rs.40 per gallon prescribed by the 1937 notification as an existing law protected by Articles 305 and 372. Hidayatullah J. dissented, holding that the entire levy including the enhancement was valid.
Law Points
- Countervailing duty under Entry 51 List II requires similar local manufacture
- Article 301 restriction must be justified by Article 304
- existing law under Article 305 and Article 372 saved pre-Constitution notification
- post-Constitution notification must comply with constitutional requirements
- dissenting opinion held Act itself saved and Article 304(a) enabling
