STATE OF KERALA AND ORS. v. MAHARASHTRA DISTILLERIES LTD. AND ORS

Citation: [2005] SUPP. 1 S.C.R. 91

Court: Supreme Court of India

Bench: N. SANTOSH HEGDE, S.N. VARIAVA, B.P. SINGH, H.K. SEMA, S.B. SINHA

Case summary

STATE OF KERALA AND ORS. v. MAHARASHTRA DISTILLERIES LTD. AND ORS.pdf

Judgment text

STATE OF KERALA AND ORS. v. MAHARASHTRA DISTILLERIES LTD. AND ORS MAY 6, 2005 [N. SANTOSH HEGDE, S. N. VARIAVA, B. P. SINGH, H. K. SEMA AND S. B. SINHA, JJ.

] Excise Laws: Kera/a Abkari Act-Section 17(a) to (g)-Kerala General Sales Tax Act, 1963-Sections 2(xxvii), 5(2C)-Foreign Liquor Rules, 1953-Rule 13(9)- Kerala Abkari Shops (Disposal in Auction) Rules, 1974-Foreign Liquor (Storage in Bond) Rules, 1961-Kerala Distillery and Warehouse Rules, 1968: Monopoly created by Government ofKera/a in wholesale trade oflMFL in favour of Government Company KSBC-Jn view of monopoly, distillers required to sell entire manufacture oflMFL to KSBC only-KSBC not required to pay excise duty to manufacturers of lMFL but pay it later when lMPD moved out ofits warehouse~Sales Tax Authorities requiring manufacturers of IMFL to include amount ofexcise duty paid by KSBC in the turnover for the purpose ofturnover tax--Correctness of-Held: Levy ofduty is under Section 17(/) since the State intended to recover duty from KSBC on the issue ofliquor from its warehouses in course ofits monopoly wholesale trade-Duty so levied is not excise since taxing event envisaged in Section I 7(/) does hot relate to manufacture-Amount ofexcise duty paid by KSBC is actually not excise duty in real sense but a privilege price and hence does not form part ofturnover of manufacturer-However rules were amended in 1999 contemplating that KSBC to pay excise duty to manufacture at the time ofpurchase-Therefore, with effect from 1999 that amount of excise duty would form part of consideration to the manufacturer and included in their turnover for the purpose of levy of Turnover tax.

Liability to pay excise duty-Taxable event-Held: Use ofwords 'duty ofexcise' in Section 17 of the Kerela Abkari Act is not conclusive and it is for the courts to examine in each case as to whether it is in fact a 'duty of excise '-Jn order that duty may be characterized as duty ofexcise, it must be shown that it is a duty on manufacture of goods-If it is unrelated to the manufacture ofgoods, it may be any other impost permitted by law, but would not qualify as duty ofexcise. The respondent is engaged in the manufacture and sale of Indian Made Foreign Liquor (IMFL). Pursuant to the policy decision of the Government of Kerela to create a monopoly in wholesale trade of IMFL, a Government company was incorporated, namely Kerala State Beverages Corporation Limited (KSBC). Necessary amendments to the Abkari Act and the relevant Rules were made with a view to effectuate this policy.

In view of monopoly created, the respondents could not sell IMFL manufactured by them to anyone, and had to deliver the same to KSBC only for which purpose they had to submit tenders each year for the various brands of IMFL manufactured by them. KSBC was granted licence in Forms BWl and FL9 under the Bond Rules. The IMFL supplied by the respondents/distillers was stored in bonded warehouses maintained by the KSBC in accordance with the Bond Rules. KSBC also executed an agreement in Form - A under which it was obliged to observe 'the provisions of the Abkari Act and not to remove goods without payment of duty. The price paid by the KSBC to the respondents did not include the element of excise duty which was later paid by the KSBC when the liquor moved out of its warehouses. Accordingly assessments were made from time to time on the basis that liability to pay sales tax and excise duty was on KSBC. The respondent paid turnover tax on the basis of price paid to it by KSBC.

It, therefore, did not include the excise duty element while computing its total turnover. However, Sales Tax authorities on 19. 7. 1998 called upon the respondent to submit revised returns including element of excise duty paid by the KSBC. The High Court, on a challenge being made by the respondents held that this excise duty which was in fact paid by KSBC would not be regarded as being part of turn over of respondents for the purpose of levy ,of turn over tax and also declared that Section 2(xxvii) of the Kerala General Sales Tax Act authorizing the levy of turnover tax on the amounts of excise duty paid by the KSBC on the distillers was unconstitutional and STATEOF KERALA v. MAHARASHTRA DISTILLERIES LTD. 93 void. State filed appeal before this court. Pending the appeals on 1. 4.

2001 the State of Kera la amended Section 5(2C) of the Kerala General Sales Tax Act, by the Finance Act of 2001, r by adding an explanation which was brought into effect retrospectively from July 1, 1987 stating that the distillery selling liquor manufactured by it within the State to KSBC would be liable to pay turnover tax on the turnover of sale of liquor by it to KSBC which shall include any duty of excise liable on such liquor at the hands of such manufacturer whether such duty is paid by the manufacturer or by the said Corporation. The Sales Tax authorities issued notices to the respondents/distillers proposing to provisionally assess the turnover tax payable by the manufacturers from April 2001 at various rates. The respondents/distillers filed several writ petitions challenging the validity of Section 5(2C) of the Kerala General Sales Tax Act read with Section 3A of the Kerala Finance Act, 2001 as being unconstitutional, both in its retrospective and prospective operation.

They also challenged the consequent actions initiated against them by th~ Sales Tax authorities. A Division Bench of the Kerala High Court allowed these writ petitions. Aggrieved State came up in appeal before this Court. Disposing of the appeals, the Court HELD: 1. 1. The duty on liquor is imposed under Section 17 of the Abkari Act. There is no doubt that it is described as a 'duty of excise'. The Government has a discretion to levy or not to levy such duty on all liquor and intoxicating drugs in cases covered by clauses (a) to (g) of Section 17. Clauses (d) and (e) which relate to liquor manufactured under any licence granted under Section 12 or manufactured at any distillery, brewery, winery or other manufactory established under Section 14, no doubt relate to imposition of duty of excise properly so called because the duty levied on liquor manufactured under a licence granted under Section G.

12 or 14 is duty on manufacture and will squarely fall within the meaning of the term 'duty of excise'. However, clauses (b}, (c}, (t) and (g) contemplate events which are not related to manufacture, such as liquor permitted to be exported or permitted to be transported under clauses (b) and (c) or liquor issued from a distillery under clause (t) or sold in any ~ part of the State under clause (g). If the duty of excise is levied under Section 17 read with clauses (b), (c), (t) and (g) it may not be possible to contend that what is levied is a duty of excise since the taxing event envisaged under the aforesaid clauses do not relate to manufacture. [133-B-E] 1. 2. In the instant case the levy of duty is under clause (t) of Section 17 since the State intended to recover duty from KSBC on the issue of liquor from its warehouses in course of its monopoly wholesale trade. Section 18A which related to grant of exclusive or other privilege of manufacturing or supply by wholesale etc.

enabled the State to grant such privilege on the basis of annual rental by way Of consi~eration for the grant of such privilege and the rental could be collected to the exdusion of or in addition to the duty or tax leviable under Sections 17 and 18. [133-E-G] 1. 3. Thus, the levy of duty under Section 17 need not necessarily be duty of excise stricto sensu. In each case the Court has to consider whether, having regard to the nature of. levy, it is a duty of excise or other impost. The mere fact that a duty is described as a duty of excise in a statute may not be conclusive, particularly when -there is a competing entry under which such a duty may be levied. In order that a duty may be characterized as "duty of excise" it must be shown that it is a duty on manufacture of goods. If it is unrelated to the manufacture of goods, it may be any other impost permitted by law, but would not qualify as a duty of excise. [133-G-H; 139-E] Synthetic and Chemicals Ltd and Ors. v. State ofUP.

and Ors. , [1990] 1 SCC 109; Re : Central Provinces and Berar Sales of Motor Spirit and Lubricants Taxation Act, 1938 : AIR 1939 FC 1 ; The Province ofMadras v. Messrs. Boddu Paidanna and sons AIR (1942) FC 33; Governor-General in Council v. Province ofMadras, AIR (1945) PC 98; R. C. Jail v. Union ofIndia, [1962) Sppl 3 SCR 436; Re: The bill to amend Section 20 ofthe Sea Customs Act, 1878 and Section 3 ofthe Central Excises and Salt Act, 1944: [1963] 3 SCR 787; Mis. Guruswamy and Co. etc. v. State a/Mysore and Ors. , [1967] 1SCR548; Mis. Mcdowell and Co. Ltd v. C. T. 0. , [1977) 1SCC441; Mis. Mcdowell and Co. Ltd v. C. T. O. , [1985) 3 SCC 230; Mohan Breweries and Distilleries Ltd v. Commercial Tax Officer, [1997) 7 SCC 542 and State of' -, STATEOFKERALA v. MAHARASHTRADISTILLERIES LTD. 95 ). Kera/av. Madras Rubbery Factory Ltd. , [1998) 1 SCC 616, referred to. 2. 1. Perusal of various Notifications issued .

from time to time under Section 17 shows that different rates of duties have been prescribed for different kinds of liquor. If the duty imposed was in the nature of excise duty on manufacture, different rates could not have been· prescribed depending upon whether it is sold in the market or consumed by the defence services personnel. Having regard to the language of the Notifications it cannot be said that duty is levied on manufacturer because Notifications suggest that such duty would be levied either on the goods manufactured in the area or imported in the area. The duty levied on import of liquor is referable only to Entry 8 of List II and not Entry 51 thereof. [135•B, F, G] 2. 2.

In accordance with the provisions of the Abkari Act and Rule 11 of the Foreign Liquor (Storage in Bond) Rules, 1961, goods purchased by KSBC during the relevant period were without payment of excise duty and the excise duty thereon was payable at the time of removal of goods from the bonded warehouse to FL9 premises. KSBC remitted turnover tax on the total value of its turnover for each year at the rate of turnover tax prevalent during the relevant year. The turnover of KSBC was computed so as to include the value of the goods at which the supplies were received by them; excise duty and sales tax paid by them and profit " margin.

Therefore, the duty was levied at the stage of movement of the goods from the bonded warehouse of KSBC to the FL9 premises and, therefore, the levy of duty in terms of Rule 11 must necessarily be traced to Section 17(t) which levied duty on liquor "issued from a distillery, brewery, winery or other manufactory or warehouse licensed or established under Section 12 or Section 14". It would therefore not be correct to contend that the duty was levied on manufacture only. (136-B-E) 3. 1. Thus, the duty imposed is not a duty of excise but represents the privilege price charged by the Government from KSBC as a consideration for parting with its exclusive privilege to sell liquor by wholesale in the State of Kerala, the respondents are not liable to include .. ( that duty paid by KSBC in their turnover. [141-B) -~ 3. 2. However, the position changed radically with effect from ' I I- January 5, 1999.

With effect from January 5, 1999, by amendment of the Foreign Liquor Rules, KSBC was required to pay to the distillers/ manufacturers, the duty element levied under Section 17, before removing the IMFL to its licensed premises. In view of the_ amendment, KSBC could not purchase IMFL from the manufact~rers/distillers without payment of duty. Thus KSBC paid to the manufacturers 'the duty payable in ·respect of IMFL and consequently the amount of ·duty paid formed part 'or the consideration for whi~h the property in goods passed to KSBC. ThererJre, ~ . ~'. ) .. from January 5, 1999, the date with effect from which KSBC started paying duty to the manufacturers/distillers b·~t6re lifting the stock' ~r'IMFL 1 to its own licensed premises, the amount of duty paid formed part 'or the consideration paid by KSBC to the manu. facturer~ _and consequently it formed part of the turnover of the manufacturers. 1141-C, D, E, G] - 4. 1.

The contention of respondents ·that in' view o·r the provisions of 1 Secti~ns 5(1) and 5(2C) of Kerela General Sales Tax Act~ th~re was no liability on the manufacturer of liquor to pay turnover tax·on the sale of IMFL has no merit. T~e levy of tax under Kerela General Sales Tax Act is by virtue of Section 5. Section 5(1) deals with levy of Sales Tax, whilst Section 5(2C)(i). Under Section 5(1)(i) of Kerala General Sales Tax Act, tax is payable (a) on goods specified in the First and Second Schedule, (b) at the rates and '(c) at the points specified against such goods ill the said Scti'edules. However, under Section 5(2C) which is the chargin_g Section "Notwithstanding anything contained in' this Act or the Rules" "every dealer shall pay turnover tax. " Thus, no dealer is exempted from paying turnover tax. The turnover tax is to be paid "as specified hereunder", and not at rates and at points specified in the Fi~st Schedule.

The rate is specified in (2C)(i)(b) at 5% on the turnover at all points. The words "By any dealer" only go with "in Foreign Liquor (Indian made) or Foreign Liquor (Foreign made). The First Schedule deals with "goods in respect of which a single point of tax is leviable under sub-section (1) or sub-section (2) of Section 5". The four columns in the First Schedule set out (1) the Serial Number, (2) Description of goods, (3) Point of levy and (4) Rate of Tax - %. In the First Schedule there is no column for dealer. The reference ' ' to a dealer is only in column (3) which will ir~icate, the P. Oint of time at which a dealer will pay tax. If under the charging S~ction. th~, poin. t of time is not to be as per the First Schedule, then one will not consider column ,_ (3) at all. This is clear as the only items are ''goods", "point of levy" and STATEOF KERALA v. MAHARASHTRADISTILLERIESLTD. -- "Rate of Tax - •1. ".

Whilst co~sidering point and rate at which levy is to be made under Section 5(l)(i) the levy and rate will be as per the First Schedule but under Section 5(2C)(i)(b) the levy is at all points and at 5% of the turnover. It is only If one has to see at wh~t point and at what rate the levy is to be made that one will take columns (3) and (4) of the First Schedule into consideration. As against this under Section 5(2C)(i) the turnover tax is on "Foreign Liquor" specified in entries 53 and 54, i. e. , in column (2) of entries 53 and 54. Thus, in Section 5(2C)(i) there is no J -- reference to columns (3) and (4) . or the First Schedule. This is clear from the fact that under Section 5(2C), which is the charging Section, turnover tax is payable by "all dealers". The term "dealer" is defined in Section 2(viii) and admittedly covers the Respondents. (142-A, B, G; 143-A-GI 4. 2.

If submission on behalf of the Respondents is accepted and it is held that the words "as specified in entries against serial numbers 53 and 54 of the First Schedule" go with the words "by any dealer", even then und! r column (3) of Entries 53 and 54 of the First Schedule the relevant words are "by a dealer who is liable to pay tax under Section 5". Admittedly, the Respond~nts are dealers who are liable to pay tax under Section 5. They only get exempt from paying tax under Section S(l)(b) ,.. because the sales tax is to be paid "af the rates" and "only at points ·, specified against the goods in the First Schedule". Under column (3) of the First Schedule in entries 53 and 54 the points of levy are (a) for KSBC the point of levy is at time of sale, (b) by a dealer, who is liable to tax I under Section 5, the levy is at point of first sale. However, if the first sale \ .

· is to KSBC then at that point there is no levy under Section 5(l)(b) because the charging Section provide that the levy is to be as per the Schedule. Section 5(2C)(i) does not lay down that tax is to be paid at the point and at the rate specified against the goods in the Schedule. Under Section 5(2C)(i) the tax is at the rate of 5% on the turnover at all points. 1 (144-B, c', D) 5. 1. Thus the Respondent would in any event be liable to pay turnover tax on their turnover.

High Court, was right in holding that the / amendment of Section 5(2C) of the Kerala General Sales Tax Act by adding an explanation which was brought into effect retrospectively from July I, 1987, did not remove the constitutional invalidity in the statute ~ because in view of the finding recorded by the High Court that the --: manufacturers w~re not liable to pay exci~e d~ty, an amendment to the Sales Tax Act could serve no purpose 1mless lacuna 'was removed by appropriate amen~men_t to ihe Abkari Aet: u'the Act ht1posing'the' levy did not impose upon the manufacturers the liability to pay excise duty, '; . . ~.. t t ~ . ·' . by an amendment of th~ Sales_Tax Act the same co~ld not be included ·in their turnover. (144-E, F, G, H; 145-A] 5. 2. Respondents - manufacturers/ distillers are liable to pay turnover .... tax. It is. declared that the respondents - manufacture.

rs are liable to include in their turnover the amount of duty paid to them by KSBC and included in the consideration for sale of IMFb to KSBC with effect from January 5, 1999 and pay the turnover tax accordingly. (145-A, -BJ Mohan Breweries and Distilleries Limited v. Commercial . Tax Officer. A Madras and Ors. , (19971 7 SCC 542; A. B. Abdulkadir and. Ors. v. The State of Kera/a and Anr. , (19671 Supp. 2 SCR 741;_ R. C. Jail v. Union ofln~ia, (1962) Supp. 3 SCR 436; Mcdowell and Co. ~td. v. C. T. O. , (1985] 3 SCC 230; State of Kera/a v. Madras Rubber Facto1y, (19981 I SCC 616 and Deputy Commissioner of Sales Tax (Lall), _B9ard of Revenue_ (Taxes), Ernakulam v. Hindustan P,etroleum Corporation- (2000) 10 SCC. 535; Hindustan Petroleum Corporation. v. State ofKera/a, (1989) STC ,106; Mis. South. Travancore Distilleries and Allied Products, Trivandrum v. State of Kera/a dated 2nd August, 1989 by Ker~la High C~urt; Sou_thern Pharmaceuticals & Chemicals v.

State ofKera/a, AIR (1981) SC 1863; Moni ,. __•·' Simon v. State ofKera/a, (1984) KLT-1060;. State ofPunjab and Anr v. Mis. l )- Devans Modern Breweries and Anr (2003) J'f (10) 485 and Synthetics and Chemicals Ltd. andOrs. v. State ofU. P. and Or;s. , (1990) 1SCC109, referred to. CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 2249-2257 • t . . of 2000. From the Judgment and Order dated 27. 11. 99 of the Kerala High Court •. . r ·'. , in O. P. Nos. 23008/98-L, 23903/98-U, 818/99, 2255/99, 2764/99, 12893/99, . . ~ . 3283/99, 7437/99 and 19686 of 1999. ·- ·WITH C. A. Nos. 95, 102, 622/2003, 3160doo5, 5099, 5100, 510i, 5102, 5103, 6515, 6516, 7952, 7954 of 2003. i ' STATEOFKERALA v. MAHARASHTRADISTILLERIESLTD. [B. P. SINGH,J. ] 99' T. L. V. Iyer, John Mathew, K. R. Sasiprabhu and Ms. Indra with him for the Appellants. F. S. Nariman and Ashok H. Desai, V. Giri, Ms. Indu Malhotra, Ms. Madhu· Sweta, Ms. Anjali K. Venna, Niraj Gupta, Ms. Liz Mathew, E. M. S.

Anam and Fazlin Anam with them for the Respondents. The Judgment of the Court was delivered by . B. P. SINGH, J. Leave granted in Special Leave Petition (C) No. 1032 of 2003. In these two batches of appeals, a common question arises, inter alia for consideration by this Court, namely - Whether. the incidence of excise duty, having regard to the provision ofthe Kerala Abkari Act and the relevant Rules, falls upon the manufacturer/distiller such as the respondents herein and therefore includable in their turnover for the purpose of levy of turnover tax,_ or whether the incidence ofexcise duty falls on the Kerala State Beveragc:s (Manufacturing and Marketing) Corporation Limited, a Government company ' which alone is liable to pay the excise di. it}' 'on Indian Made Foreign Liquor, and consequently the said component is not inchidable in the turnover of the respondents/distillers? , · Thes·e appeals came up for. hearing before a 3 ·Judge Bench of this Court.

After hearing the parties for sometime, by order dated -October 17, 200l, it was observed that the point . involved was . an important one and it would be appropriate if the cases are heard by a Larger bench. The referring Bench observed thus :- "The question which arises for consideration in these cases is, whether the excise duty levied· under the provisions of:,,the Kerala Abkari Act on Indian Made Foreign Liquor which is manufactured fonns part of the turn over of the manufacturer for •the purpose of levy of turn over tax under the relevant provisions ofthe Kerala Sales Tax Act? The liquor which is manufactured l:iy the respondents has to be sold to the Beverages Corporation which· can be regarded as sole selling agent or the canalizing agenc'y. The liquor manufactured is removed to the bonded warehouse of the Beverages'Corporation. At the. time when the liquor is removed from that bonded warehouse, thi. : excise duty is paid by the Beverages·Corporation.

In the notices which were sent to the respondents, it was stated that this excise duty which was paid by the Beverages Corporation really forms part of the tum over of the respondents in the sale of liquor by them to the Beverages Corporation and, therefore, tum over tax was payable on this element as well. The contention of the State was that this exci~~·duty was really an obligation ofthe manufacturer and merely because the obligation was discharged by the Beverages Corporation would not mean that the same would not form part ofthe tum over of the manufacturer. The High Court, on a challenge being made by the respondents, decided in their favour and came to the·conclusion that this excise duty which was In fact paid by the Beverages Corporation would not be regarded· as being part of their tum over for the purpose of levy of tum over tax. Mr. T. L. V. Iyer, learned senior counsel has drawn our attention to a decision of this Court in the case of Mohan Breweries & Distilleries Ltd v.

Commercia/'Tax Offif. er, Madras and Ors. , [1997) 7 SCC 542. In that case this Court was concerned with the levy of I / tum over tax in respect of liquor which was produced and sold to the. ' State Marketing Corporation. It is the contention of Mr. Iyer that th~ · .. -to" provisions of the Jaw in Tamil Nadu relating to the levy of this tax is more or less parimateria with the corresponding provisions of law in Kerala. In particular, reliance was placed on paragraph 7 of the aforesaid decision which reads as follows: '7. Excise duty is levied upon goods manufactured or produced (Entry 84 ofList I and Entry 51 ofList II ofthe Seventh Schedule to the Constitution). Its in. cidei1ce falls, therefore, on the ' manufacturer or producer of the goods. The collection of excise I ; j duty may be deferred to such later stage as is, administratively I or otherwise, most convenient'. r '..

Basing itself on the aforesaid observations, this Court concluded ' that even if Rule 22 of the Tamil Nadu Rules provides for realization of the excise duty from the Corporation that was only a convenient method ofcollection, the primary obligation to pay excise duty being only of the manufacturer. Mr. Iyer, therefore, contended that following ~ the said decision the appeals should be allowed. STATEOF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B. P. SINGH, J. ] I0 I Mr. F. S. Nariman, learned senior counsel for the respondents has -· drawn our attention tp three Constitution Bench decisions of this Court. In the case ofA. B. Abdullcadir and Ors. v. The State ofKera/a and Anr. , [1967) Supp. 2 SCR 741, where at page 751 it was observed as follows : 'It may also be accepted that generally speaking the tax is on the manufacturer or the producer, though it cannot be denied that laws are to be found which impose a duty ofexcise at stages subsequent to the manufacture or production.

• (emphasis added) In R. C. Jail v. Union ofIndia, [1962) Supp. 3 SCR 436, at page 451, it was contended that the excise duty cannot be legally levied on the consignee who had nothing to do with th~ manufacture or production of coal. This argume~t was repelled and at page 451, it was observed as follows : 'Excise duty is primarily a duty on the production or manufacture ofgoods produced or manufactured within the country. •tis an indirect duty which the manufacturer or producer passes on to the ultimate consumer, that is, its ultimate incidence will always be on the consumer. Therefore, subject always to the legislative competence of the taxing authority, the sa~d tax can be levied at a convenient stage so long as the character of the impost, that is, it is a duty on the manufacture or production, is not lost. The method ofcollection does not affect the essence of the duty but only relates to the machinery of collection for administrative convenience. ' In Mis. Guruswamy & Co. Etc. v.

State of Mysore and Ors. , [1967) 1 SCR 548, at page 562, another Constitution Bench held as follows : 'These cases establish that in order to be an excise duty (a) the levy must be upon 'goods' and (b) the taxable event must be the manufacture or production of goods. Further the leliy need not be imposed at the stage ofproduction or manufacture but may be imposed later. " (Emphasis added) ~· J{- · Relying.. upon the aforesaid observations of this Court, in cases referred to hereiriabove, Mr. Narimari contends that the observations ·ofthis Court in M~han Breweries"ca'se'(supra) seem to run counter .. 10· the'earlie~ decisions of the Constittition Benches. He submits that the Constitution Benches have laid down in no uncertain terms that an excise duty need not necessarily be regarded as being a levy only ,.. ,... ,~ ... . : . . . . . on the manufacturer and it is possible for a law to provide that excise ' . .. .. '. .

" ' ' duty may be levied not on the manufacturer but at a later point of ~. . . ' . ~ ··, . time. He, therefore, contends that the observation to the contrary in Mohan Breweries ' case does not reflect the position in law correctly ·and he. submits that in the present cases, on a correct interpretation of Sections 17 and 18 of the Abkari Act of Kerala, it must be held that t~~· le. vy of excise duty, is iiot on the manufacturer but is at the stage when the liquor is removed by the Beverages Corporation from the ·warehouse and therefore' 'the' same cannot form part of the respondents' turn over: In our opinion, the point involved is an important one and it would be appropriate· if this and the connected cases are heard by a larger Bench: ' We direct, the papers be laid before Hon'ble the Chier'Justice'for appropriate orders. "· Th~~ is how these appeals have been placed by the Hon'ble Chief I. Justice before this Bench for disposal. · ! • ~ .

• • The first bateh of appeals arise out ~f writ petitions filed in the years 1998 - 1999 which were disposed of by a common judgment and order of a Divisio_n \Bench of the High Court dated 27th November, 1999 in OP Nos. 23008-239,03/98, 818, 2255, 2264, ~. 2. 893, 32. 83; 7437 and 19686/99 whereby the High Court allowed the writ petitions filed by the respondents/distillers holding inter alia that under the Scheme of the Kerala Abkari Act and the Rules, the incidence ofexcise duty on the manufacture ofIndian Made Foreign Liquor was required by law to be borne by the Kerala Beverages Corporation to whom the liquor was sold at a price which did not include the element of excise duty. Consequently the State ofKerala and its officers were not entitled to levy turnover tax on the respondents/distillers by including in their turnover the exci~e duty payable on the liquor manufactured and sold by the respondents/distillers to the Kerala State Beverages Corporation.

The High Court also declared that Section 2(xxvii) of the Kerala General Sales Tax'Act JI> authorizing the levy of turnover tax on the amounts of excise duty paid by the Kerala State Beverages Corporation on the distillers was unconstitutional and void. After the judgment of the High Court in the first batch of writ petitions, and while the appeals against the said judgment and order were pending before this Court, on 1. 4. 2001 the State of Kerala amended Section 5(2C) of the Kerala General Sales Tax Act, by the Finance Act of 2001, by adding an explanation which was brought into effect retrospectively from July 1, 1987 which reads as follows :- "Explanation : For the removal of doubt it is hereby clarified that any distillery in the State which sells liquor manufactured by it within the State to the Kerala State Beverages Corporation shall be liable to pay turnover tax on the turnover of sale of.

liquor by it to the said Corporation and the turnover for the purpose of this sub-section shall include any duty of excise liable on such liquor at the hands of such manufacturer whether such duty is paid by the manufacturer or by the said Corporation. " Since the Sales Tax authorities issued notices to the respondents/distillers proposing to provisionally assess the turnover tax payable by the manufacturer~ from April 2001 at various rates, the respondents/distillers filed several writ petitions challenging the validity of Section 5(2C) of the Kerala General Sales Tax Act read with Section 3A of the Kerala Finance Act, 2001 as being unconstitutional, both in its retrospective and prospective operation. They also challenged the consequent actions initiated against them by the Sales Tax authorities. A Division Bench of the Kerala High Court allowed these writ petitions by a common judgment and order of August 9, 2002 in OP Nos.

3736, 5139, 1705, 4464, 6075, 6113, 6116, 6122, 6239, 6336, 7639, 7666 of 2002 and 31153 of 2001. The Division Bench disposing of the aforesaid writ. petitions did not agree in principle with the law as laid down in the earlier judgment disposing of the first batch of writ petitions and was ofthe view that the incidence of excise duty fell squarely on the respondents/ distillers and as such was includable in their total turnover for purpose of computation of turnover tax under the Kerala General Sales Tax Act. However, the Division Bench held itself bound by the earlier decision rendered by the High Court and, therefore, following the earlier decisitm held that by adding .. . ~ an explanation to Section 5(2C) by the Kerala General Sales Tax Act the constitutional lacuna pointed out in the earlier judgment had not been removed by appropriate amendment to the Kerala Abkari Act.

By merely adding the explanation to Section 5(2C) of the Kerala General Sales Tax Act, the excise duty element ·paid by the Corporation could not be added to the turnover of the respondents/distillers since it had been held in the earlier judgment that excise duty was leviable only on the purchaser, namely, the Kerala State Beverages Corporation. In this view ofthe matter the High Court allowed the writ petitions and declared that the explanation appended to Section 5(2C) ofthe Kerala General Sales Tax Act was unconstitutional and invalid both in its prospective operation from 1st April, 2001 and in its retrospective effect from 1st July, 1987. · OP No. 1477112002 out of which C. A. No. 7954 of 2003 arises was also disposed of in the same terms by the High Court by its order dated August 12, 2002.

To appreciate the rival contentions of the parties iris necessary to refer D; to the relevant provisions of the Kerala Abkari Act and the relevant Rules as also the provisions ofthe Kerala General Sales Tax Act, 1963. The provisions have to be viewed in the light of the policy decision of the Government of Kerala to create a State monopoly in manufacture, wholesale purchase and sale of Indian Made Foreign Liquor (IMFL) with effect from 1. 4. 1984. A Government company ·was incorporated; namely Kerala State Beverages I (Manufacturing and Marketing) Corporation Limited (Kerala Beverages Corporation). Necessary amendments to the Abkari Act and the relevant ( Rules were made with a view to effectuate this policy.

The respondents/ } I distillers could not, in view of the monopoly created in favour of the Kerala State Beverages Corporation, sell IMFL man~factured by them to anyone, and had to deliver the same to the Kerala State Beverages Corporation for which· purpose they had to submit tenders each year for the various brands of IMFL manufactured by them. The Kerala State Beverages Corporation was granted licence in Forms BWI and FL9 under the Bond Rules. The IMFL supplied by the respondents/distillers was stored in bonded warehouses maintained by the Kerala State Beverages Corporation in accordance with the Bond Rules. The Kerala State Beverages Corporation also executed an agreement in Form - A under which it was obliged to observe the provisions of the Abkari Act and not to remove goods without payment of duty.

The price ·paid by the Kerala State Beverages Corporation to the respondents/ distillers did not include the element of excise duty which was later paid by the Kerala State Beverages -Corporation when the liquor moved out of its STATEOFKERALA v. MAHARASHTRA DISTILLERIES LTD. [B. P. SINGH,J. ] 105 warehouses. In view of the policy to create a State monopoly, and having regard to the Scheme of the Kerala Abkari Act and the relevant Rules, the respondents/ distillers contended that the Kerala Abkari Act did not impose a liability on the respondents/distillers to pay excise duty since such a liability was imposed only on the Kerala State Beverages Corporation which actually paid excise duty payable on the IMFL.

Consequently the element of excise duty did not form part of the turnover of the respondents/distillers and was therefore not includable in the total turnover of the respondents/distillers for purpose of computation ofturnover tax payable by them under the Kerala General Sales Tax Act. The Kerala Abkari Act was formerly known as Cochin Abkari Act enacted in the year 1902. It applied to the territories comprised within the State of Cochin but with effect from I Ith July, 1967, by Act IO of 1967, the provisions of the Act were extended to the whole of the State of Kerala. Chapter IV of the Act deals with manufacture, possession and sale of liquor. The relevant part of Section 12 reads as follows :- "12. (l) Manufacture of liquor or intoxicating drug prohibited except under the provisions of this Act:- No liquor or intoxicating drug shall be manufactured.

except under the authority and subject to the terms and conditions of a licence granted by the Commissioner in that behalf, or under the provisions of Section 21; Section 14 deals with establishment and control 6fdistilleries, Beverages, warehouses etc. and provides as follows :- "14. Establishment and control of distilleries, breweries, warehpuses, etc.

:- The Commissioner may, with the previous approval of the Government:- (a) establish public distilleries, breweries or wineries, or authorize the establishment of private distilleries, breweries, wineries or other manufactories in which liquor may be manufactured under a license granted under this Act; (b) establish public warehouse or authorize the establishment of private warehouses wherein liquor may be deposited and kept without paym~nt of duty under a license granted under this Act; · (c) discontinue any public or private distillery, brewery, ·winery or other manufactory or warehouse so established; (d) prescribe the mode of supervision that may be necessary in a distillery, brewery, winery or other manufactory or warehouse so established, or in any other manufactory where preparation containing liquor or intoxicating drugs are manufactured, to ensure the proper collection of duties; taxes and other dues payable under this Act or the proper utilization of liquor or intoxicating drugs; Chapter v.

of the Act deals with duties, taxes and rentals. Sections 17 and 18, which are relevant, provide as follows :- "17. Duty on liquor or intoxicating drugs :- A duty of excise or luxury tax or both shall, if the Government so direct, be levied on all liquor and intoxicating drugs (a) permitted to be imported under Section 6; or (b) permitted to be exported under Section 7; or (c) permitted under Section 11 to be transported ; or (d) manufactured under any licence granted under Section 12; or (e) manufactured at any distillery, brewery, winery or other manufactory established under Section 14; or .

1 (f) issued from a distillery, brewery, winery or other manufactory or warehouse licensed or established under Section 12 or Section 14; or (g) sold in any part of the State ; Provided that no duty or gallonage fee or vend fee or other taxes shall be levied under this Act on rectified spirit including absolute alcohol which is not intended to be used for the manufacture C\f potable liquor meant for human consumption. Explanation :- For the purpose of this section and Section l S, the expression "duty of excise", with reference to liquor or intoxicating drugs, include countervailing duty on such goods manufactured or produced elsewhere in India and brought into the State. " "IS.

How duty may' be imposed :- (I) Such duty of excise may be levied: (a) in the case of spirits or beer, either on the quantity produced in or passed out of a distillery, brewery or warehouse licensed or established under Section 12 or Section 14 as the case may b~ or in ; ' accordance with such scale of equivalents, calculated on th~ quantity of materials used or by the degree of attenuation of the wash or wort or on the value of the liquor as the case may be as the Government may prescribe ; Section ISA of the Act provides as follows :- ; "I SA. Grant of exclusive or other privilege of manufacture, etc. , on payment of rentals :- (I) it shall be lawful for . the Government to grant to any person or persons, on such conditions and for such E.

period as may deem fit, the exclusive 9r other privilege- (i) of manufacturing or supplying by wholesale; or (ii) of selling by retail; or (iii) of manufacturing or supplying by wholesale and selling by retail, any liquor or intoxicating drugs within any local area on his or their payment to the Government of any amount as rental in consideration of the grant of such privilege. The amount of rental may be settled by auction, negotiation or by any other method as may be determined by the Government from time to time, and may be collected to the exclusion of, or in addition, to the duty or tax leviable under Sections 17 and lS. (2) No grantee of any privilege under sub-section (1) shall exercise th. e same until he has received a licence in that behalf from the Commissioner. (3) In such cases, if the Government shall by notification so direct, the provisions of Section 12 relating to toddy and toddy producing trees shall not apply.

" We may notice at this stage that Section 17 has been amended with effect from April 1, 2003, to the effect that the words "if the Government so directs", and clauses (b), (c), (f) and (g) stand deleted. In exercise of powers conferred by Section 29 of the Abkari Act the Government of Kerala has framed Rules for the establishment and working of Distilleries, Warehouses and Excise Depots for regulating the· issue and the description of goods under Entry 53 of Schedule I, namely "Foreign Liquor (Indian made)". In the case of inconsistency, Section 5(2C)(i) must prevail over the Schedule in view of the non obstante clause. If submission on behalf of the Respondents is accepted and it is h~ld that the words "as specified in entries against serial numbers 53 and 54 of the First Schedule" go with the words "by any dealer", even then under column (3) of Entries 53 and 54 of the First Schedule the relevant words are "by a dealer who is liable to pay tax under Section 5".

Admittedly, the Respondents are dealers who. are liable to pay tax under Section 5. They only get exempt from paying tax under Section 5(l)(b) because the sales tax is to be paid "at the rates" and "only at points specified against the g~ods in . the First Schedule". Under column (3) of the First Schedule in entries S3 and 54 the points of levy are (a) for the Kerala State Beverages Corporation the point of levy is at time of sale, (b) by a dealer, who is liable to tax under Section 5, the levy is at ' point of first sale. However, if the first sale is to Kerala State Beverages ·Corporation then at that point there is no levy under Section 5(1)(b) because . the charging Section provide that the levy is to be as per the Schedule. Section 5(2C)(i) does not lay down that tax is to be paid at the point and at the rate specified against the goods in the Schedule. Under Section 5(2C)(i) the tax is at the rate of 5% on the turnover at all points.

Thus the Respondent would in any event be liable to pay turnover tax on their turnover. Further, in the 1st judgment there is no discussion on this aspect at all. In the 2nd judgment the decision is against the Respondents on this aspect against which they have filed no Appeal. We entirely concur with the view ofthe High Court in the second batch of writ petitions on this aspect of the matter. The High Court, however, held that the amendment of Section 5(2C) of the Kerala General Sales Tax Act by adding an explanation which was brought into effect retrospectively from July 1, 1987, did not remove the constitutional invalidity in the statute because in view of the finding recorded by the High Court that the manufacturers were not liable to pay excise duty, an amendment to the Sales Tax Act could serve no purpose unless lacuna was removed by appropriate amendment to the Abkari Act.

We find ourselves in complete agreement with the view of the High Court because if the Act imposing the levy did not impose upon the manufacturers the liability to pay excise duty, by an amendment of the Sales Tax Act the same could not be STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B. P. SINGH, J. ] J45 included in their turnover. In the result Civil Appeal Nos. 2249-2257 of 2000 are partly allowed and it is declared that the respondents - manufacturers/ distillers are liable to pay turnover tax. It is declared that the respondents - manufacturers are liable to include in their turnover the amount of duty paid to them by KSBC and included in the consideration for sale of IMFL to the aforesaid Corporation with effect from January 5, 1999 and pay the turnover tax accordingly. Civil Appeal Nos. 95 of 2003; 102 of 2003 ; 622 of 2003 ; Appeal arising out of SLP (c) No. 1032 of 2003 ; Civil Appeal Nos.

5099 of 2003 ; 5100 of2003; 5101 of2003; 5102 of2003; 5103 of2003; 6515 of2003 ; 6516 of 2003 ; 7952 of 2003 and 7954 of 2003 are dismissed. No order as to costs. D. G. Appeals disposed of. --+~ '