IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 25th DAY OF JUNE, 2019 BEFORE THE HON'BLE MRS.JUSTICE S.SUJATHA WRIT PETITION Nos.8706 - 8709/2019 c/w W.P.No.15748/2019 (EXCISE) IN W.P.Nos.8706 - 8709/2019: BETWEEN: BACARDI INDIA PVT. LTD., REP BY T.C.RAVICHANDRA GENERAL MANAGER OF BACARDI INDIA PVT. LTD., 3RD KM STONE, CHAMARAJA NAGAR ROAD NANJANGUD, MYSORE-571301 PETITIONER [BY SRI S.S.NAGANAND, SENIOR COUNSEL FOR SRI AJAY J.N. AND SMT.POOJA UPADHYA, ADVS.] AND: 1. THE STATE OF KARNATAKA ACTING THROUGH THE CHIEF SECRETARY, VIDHANA SOUDHA, BANGALORE-560 001 2. THE DEPUTY COMMISSIONER OF EXCISE MYSORE DISTRICT, NANJANGUD MYSORE-571301 3. THE COMMISSIONER OF EXCISE 2ND FLOOR, TTMC BUILDING, A BLOCK, BMTC, SHANTINAGAR, BANGALORE-560002 RESPONDENTS [BY SMT.M.JYOTHI, AGA.] -2- THESE WRIT PETITIONS ARE FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA, PRAYING TO DECLARE THAT RULE 20(2) OF THE EXPORT RULES ISSUED UNDER THE EXCISE ACT IS ULTRA VIRES SECTION 71 OF THE EXCISE ACT, IS WIHTOUT THE AUTHORITY OF LAW AND IN VIOLATION OF ARTICLE 14 OF THE CONSTITUTION OF INDIA. IN W.P.No.15748/2019: BETWEEN: BACARDI INDIA PVT. LTD., REP. BY Mr. SUSHIL KUNDER, SENIOR MANAGER - SALES OF BACARDI INDIA PVT. LTD., 3RD KM STONE, CHAMARAJA NAGAR ROAD, NANJANGUD, MYSORE-571 301. PETITIONER [BY SRI S.S.NAGANAND, SENIOR COUNSEL FOR SRI AJAY J.N., ADV.] AND: 1. THE STATE OF KARNATAKA ACTING THROUGH THE EXCISE SECRETARY, MINISTRY OF EXCISE, VIDHANA SOUDHA, BANGALORE-560 001. 2. THE DEPUTY COMMISSIONER OF EXCISE MYSORE DISTRICT, NANJANGUD, MYSORE-571 301. 3. THE ADDITIONAL COMMISSIONER OF EXCISE 2ND FLOOR, TTMC BUILDING, "A" BLOCK, BMTC, SHANTINAGAR, BANGALORE-560 002. 4. THE COMMISSIONER OF EXCISE 2ND FLOOR, TTMC BUILDING, "A" BLOCK, BMTC, SHANTINAGAR, BANGALORE-560 002. -3- 5. THE EXCISE SUPERINTENDENT NANJANGUD, MYSORE DISTRICT, MYSORE-571301 (CAUSE TITLE AMENDED VIDE COURT ORDER DATED 12.06.2019) RESPONDENTS [BY SMT.M.JYOTHI, AGA.] THIS WRIT PETITION IS FILED UNDER ARTICLE 226 OF THE CONSTITUTION OF INDIA, PRAYING TO DIRECT R-2 NOT TO WITHHOLD PROCESSING THE PETITIONER'S APPLICATION FOR EXPORT PERMIT AND TO EXPEDITIOUSLY PROCESS THE SAME. THESE PETITIONS HAVING BEEN HEARD AND RESERVED, ARE COMING ON FOR PRONOUNCEMENT OF ORDER THIS DAY, S.SUJATHA J., PASSED THE FOLLOWING: ORDER
Since these petitions involving similar and akin issues, they have been considered together and are taken up for final disposal by this common order.
2. The petitioner has sought for a declaration, to declare [SECTION] of the [ACT] ('Rules' for short) issued under the [ACT] ('Act' for short) is ultra vires [SECTION] of the Act, the same should be read as being directory and not mandatory in nature, inter alia, seeking a direction to respondent No.2, not to withhold the processing of petitioner's application for export permits further to expeditiously process the same. The Official Memorandum bearing No. EXE/BACARDI/01/EXPR/2018-19 dated 05.04.2019 is also challenged as being arbitrary and illegal.
3. The petitioner, a company registered under the [ACT], is engaged in the business of manufacturing and selling alcoholic beverages from its distillery located in Nanjangud, Karnataka. The manufactured liquor is supplied within the State of Karnataka and exported to other States in India as well.
4. In cases where the petitioner intends to export liquor manufactured in Nanjangud, as per the provisions of the [ACT] and Rules thereunder, the petitioner applies for an export permit, furnishes a bank guarantee as prescribed and then exports the liquor. The petitioner applies for and follows up with the Excise Department in the destination State for issuance of Export Verification Certificates (EVCs) for the consignments exported. No sooner the EVCs are issued, the petitioner submits the same to the Karnataka Excise Department.
5. It is the contention of the petitioner that in some cases, for reasons beyond the control of the petitioner, the destination State issues EVCs only after the expiry of 60 days from the date of export. In such cases, the petitioner submits that EVCs to the respondents belatedly i.e., after expiry of the period of 60 days. In this regard, respondent No.2 passed an order impugned dated 11.02.2019 demanding Rs.76,06,281/- as excise duty on liquor exported from Karnataka on the basis of EVCs submitted by the petitioner to the respondents after the expiry of 60 days. Attempts are made by respondent No.2 to invoke the bank guarantee furnished by the petitioner to the extent of demands.
6. Learned Senior Counsel Sri. [ENTITY], representing the learned counsel for petitioner would submit that the liquors in question were exported out of Karnataka pursuant to the export permits issued by the respondents as evident from the EVCs and lorry receipts. Despite the same, respondent No.2 has passed the order impugned merely for the reason that EVCs were submitted after the expiry of 60 days. The literal interpretation of [SECTION] of the Rules would defeat the intention of the provision. The collection of excise duty on liquor duly exported outside the State on the garb of not furnishing the EVCs within the stipulated period of 60 days is wholly arbitrary and without authority of law, much against [SECTION] of the [ACT]. Learned Senior Counsel further submitted that alternative remedy is not an absolute bar for this Court, more particularly when the interpretation of [SECTION] of the Rules is sought for.
7. Learned Senior counsel placed reliance on the following judgments:-
1) [PRECEDENT];
2) [PRECEDENT];
3) [PRECEDENT];
4) [PRECEDENT];
5) [PRECEDENT];
6) [PRECEDENT].
8. Learned Additional Government Advocate appearing for the respondents argued that on 02.03.2018, a team of Excise Officials after a detailed inspection of the Distillery unit of the petitioner found that the petitioner had violated [SECTION] and [SECTION] of the [ACT] and [SECTION] of the [ACT] as well as [SECTION] of the [ACT] and the Distillery licence conditions. Pursuant to which notice was issued as to why action should not be initiated under [SECTION] of the Act. The said case was compounded by levying fine. It is found that the petitioner has violated [SECTION] of the Rules on multiple occasions.
9. Learned AGA argued that [SECTION] of the Rules, is regulatory in nature and it is intended to ensure that liquor manufactured in the State is not diverted and misused in the course of export. The rule is a necessary obligation imposed on the licencee (manufacturer) to comply with the restrictions to carry the trade in liquor. The object of fixing the time limit for obtaining the verification report is to avoid any reasonable doubt; whether the liquor is really exported to the distinct location as in the permit or is being diverted/misused resulting in loss of revenue to the State. Thus it is to prevent misuse of the export provision by the petitioner ensuring timely and proper action, submitting the EVCs as early as possible within sixty or ninety days (defence supplies) is necessary.
10. It was submitted that the required EVCs for the consignment exports were not totally submitted by the petitioner within the time frame and as such the demand is raised treating the same as the transaction made within the State of Karnataka. The phraseology
- 10 -
'shall' used in [SECTION] of the Rules indicate that furnishing of EVCs is mandatory, but not directory.
11. It was submitted that [SECTION] of the Act, empowers the State Government to make rules regulating import, export, transport, manufacture, possession, supply or storage of any intoxicants. Therefore, the power to regulate will encompass within itself every kind of regulation including time stipulation regarding activities of the licence. The power of the State to impose a condition regarding export of liquor by framing suitable Rules is provided under the Act itself and therefore [SECTION] cannot be construed as ultra vires the Act.
12. It was argued that the levy of penalty in the form of duty, charged at the rates applicable within the State of Karnataka is well within the competency of the State Legislature. Hence by virtue of this Rule, the State has got power to regulate the liquor i.e., exported
- 11 -
outside the state of Karnataka and for exercising such regulation the levy of penalty, in the form of duty for non submission of EVCs for liquor exported within the stipulated time cannot be termed as only directory in nature .
13. Learned AGA submitted that there is no cause of action for the petitioner to approach this Court, since no application for issue of permits were pending, nor any permits were withheld at the time of filing of the petitions.
14. Learned AGA has placed reliance on the following judgments:
1. [PRECEDENT].
2. [PRECEDENT].
3. K.[ENTITY] vs. State of Tamilnadu & others reported in (1985) 2 SCC 116.
- 12 -
4. [PRECEDENT].
15. I have carefully considered the rival submissions of the learned counsel appearing for the parties and perused the material on record.
16. On the belated submission of EVCs beyond the period of sixty/ninety days (defence supplies) prescribed, excise duty demanded on liquor treating the same as intra- State transaction made in the State of Karnataka is called in question in the teeth of the scheme of [ACT].
17. In the circumstances, the points that arise for consideration of this Court are:
"i) Whether the delay caused in furnishing of EVCs collected from the Excise authorities of the destination States would alter the rate of excise duty despite the liquor has been exported and delivered in another State has been
- 13 -
otherwise proved by substantial material rendering [SECTION] of the Rules ultra vires the [ACT]?
ii) Whether furnishing of EVCs within the time prescribed i.e., sixty days/ninety days (defence supplies) is mandatory or directory?"
18. These two questions are intrinsically interconnected. It is a well settled law that excise duty is a duty on manufacture or production. [SECTION] of the Act deals with excise duty and countervailing duty.
19. [SECTION] of the [ACT] ('[ACT]' for short) provides the manner of levy of excise duties. [SECTION] of the [ACT] provides for the levy of additional excise duty and additional countervailing duty. [SECTION] of the [ACT] provides for the levy of duty on liquors exported.
20. [SECTION] of the [ACT] provides that the State has power to legislate regarding
- 14 -
intoxicating liquors i.e., production, manufacture, possession, transport, purchase and sale of intoxicating liquor. [SECTION] empowers the State to levy fees on any of the matters in [SECTION]. Therefore, by reading [SECTION] and [SECTION], the State has power to levy fees/penalty for non compliance of the provisions of the [ACT]. Levying of such fee/penalty is only to regulate the export of liquor from the State of Karnataka to other States.
21. [SECTION] is framed by the State Government exercising the power under [SECTION] of the Act. Place of destination plays an important role in fixing the levy under the said Rules. In terms of [SECTION] of the Rules, where liquor is exported upon payment of export duty, the exporter-manufacturer is required to obtain an excise verification report/ certificate (EVC) issued by the Excise Officer at the destination State of the consignment and furnish the same to the Karnataka
- 15 -
Excise Department, which issued the Export permit. The said provision requires the EVCs to be submitted to the department within sixty/ninety days in case of supplies to Military and government bodies for issuance of export permit. If the export of liquor is not substantiated by submission of EVCs, the bank guarantee furnished by the exporter would be invocable and adjustable towards the extent of excise duty payable on the liquor exported.
22. [SECTION] of the Act contemplates power to make rules. [SECTION] of the Act reads thus:
71(2). xxxx
(a) xxxx
(b) xxxx
(c) xxxx
(d) regulating the import, export, transport, manufacture, cultivation, collection possession supply or storage of any intoxicant and may, by such rules, among other matters:
(i) regulate the tapping of toddy-
producing trees, the drawing of toddy from
- 16 -
such tree, the marking of the same, and the maintenance of such marks;
(ii) declare the process by which spirit shall be denatured and the
denaturation of spirit ascertained; and
(iii) cause spirit to be denatured through the agency or under the supervision of its Own Officers."
23. The word "regulation" was subjected to judicial interpretation in the case of [ENTITY], supra, wherein the Hon'ble Apex Court has held thus:
"18. The word "regulation" cannot have any rigid or inflexible meaning as to exclude "prohibition". The word "regulate" is difficult to define as having any precise meaning. It is a word of broad import, having a broad meaning, and is very comprehensive in scope. There is a diversity of opinion as to its meaning and its application to a particular state of facts, some courts giving to the term a somewhat restricted, and others giving to it a liberal, construction. The different shades of meaning are brought out in Corpus Juris Secundum, Vol. 76 at p. 611:
- 17 -
" `Regulate' is variously defined as meaning to adjust; to adjust, order, or govern by rule, method, or established mode; to adjust or control by rule, method, or established mode, or governing principles or laws; to govern; to govern by rule; to govern by, or subject to, certain rules or restrictions; to govern or direct according to rule; to control, govern, or direct by rule or regulations.
`Regulate' is also defined as meaning to direct; to direct by rule or restriction; to direct or manage according to certain standards, laws, or rules; to rule; to conduct; to fix or establish; to restrain; to restrict."
See also: Webster's Third New International Dictionary, Vol. II, p. 1913 and Shorter Oxford Dictionary, Vol. II, 3rd Edn., p. 1784."
24. In the case of Deepak Theatre, supra the Hon'ble Apex Court has held thus:
"10. In the above view we hold that [SECTION], [SECTION] and [SECTION] of the licence is a regulatory measure to fix the rates of admission and classification of the seating in the
- 18 -
interest of the general public. It is within the power of the licensing authority. They do not impinge upon the fundamental right to trade, avocation or business of the licensee under the Act. It is a reasonable restriction imposed in the public interest. Accordingly , we do not find any ground, warranting interference. The appeal is dismissed, but with no orders as to costs."
25. In view of the aforesaid judgments, there is no fetter on the Government to frame rules exercising the power to regulate the export of intoxicants which includes regulatory measure to insist for EVCs as a proof of export of liquor to the other destined States. The power delegated by the legislature to the executive vide [SECTION] cannot be held to be excessive, arbitrary or illegal. The next question would be whether such production of EVCs within a prescribed period is mandatory or directory.
26. The requirement of production of verification certificate within a prescribed period fell for
- 19 -
consideration before the Hon'ble Kerala High Court in the case of State of Kerala supra, and it is beneficial to quote the relevant paragraphs hereunder:
"32. The fulfillment of this condition does not depend on any act on the part of the exporter, but is dependent on the speed and efficiency of third parties or outside agencies. A strict enforcement of the provision regarding the time limit for producing the verification certificate makes the provision unworkable leading to unjust results. The production of the verification is only for proof of export and the quantity exported. If therefore it is unmistakably shown that liquor has been exported, to invalidate the export factor, because proof, though "indubitable" was adduced "a few days later than that prescribed in the notification or in a manner not mentioned their", is to "make procedure not the handmaid but the mistress and form not as subservient to substance but as superior to the essence":
[PRECEDENT].
33. We have no hesitation in holding that the provision in the notification regarding the time limit fixed for the production of the verification
- 20 -
certificate is only directory and not mandatory. It is therefore unnecessary for us to consider whether the forty two days time limit allowed by the Department from 1977-1987 can be permitted only when the notification was statutorily amended on 25-7-1987, whether the amendment was only declaratory or clarificatory in nature; and whether the power to extend the period conferred by the amendment on 5-2-1980 can be exercised for the period, 1977-1980 also.
34. On the facts now placed before us it is admitted that all the 839 cases of liquor were exported by the petitioner on the strength of permits/licenses issued by the State during the year 1977-1983. Before demands were made in 1983, the Excise authorities had before them the verification certificates showing the exact quantity of liquor that has peen imported in the Sates. If so, the petitioner was therefore liable to pay only at the rate of SO paise per proof litre. No further demand for excise duty was sustainable under the Act or the notification. The demands were clearly illegal aod opposed to [SECTION] of the [ACT] as well, as there is no law which supports these demands."
- 21 -
27. In the case of McDowell and Co., Ltd. supra, the Hon'ble High Court of Andra Pradesh, Hyderabad, has observed thus:
"4. In the light of the above, let us see whether the provision in [SECTION] prescribing a time limit of 21 days for furnishing verification reports from the date of expiry of the validity of the export permit is directory or mandatory. Sri [ENTITY], learned Counsel for the petitioners places strong reliance on judgment dated 23-2-1989 of a Division Bench of Kerala High Court comprising the Hon'ble the Chief Justice [ENTITY] and Justice [ENTITY] in [CASE NUMBER], to drive home his submission that the said provision is only directory and not mandatory. Infact, the petitioner in [CASE NUMBER] was the respondent in the said appeal, which was filed against the decision of a learned Judge in [CASE NUMBER], questioning the demand and me proceedings for recovery of excise duly by virtue of a provision similar to [SECTION] issued by way of notification by the Government of Kerala under [ACT]. In the appeal, it was the submission of the learned Advocate General appearing for the State of Kerala that "there can be no ambiguity in a taxing
- 22 -
statute; there cannot be any doubt about the inlendment of a taxing statute and there can be no equity in a taxing measure". In opposition, Sri [ENTITY], senior Counsel appearing for the exporter of liquor, the petitioner in [CASE NUMBER] /84 and the respondent in the appeal, formulated his submissions as under :
xxx xxx xxx Dealing with these submissions, Justice [ENTITY], speaking for the Division Bench formulated two aspects for consideration -
(i) What are the principles to be followed for deciding whether a particular provision in a statute is mandatory or not; and (ii) Whether those principles can be applied to a taxing statute; after referring to the following principle enunciated by the Privy Council in [ENTITY] in [PRECEDENT].
" It is a well settled general rule that 'an absolute enactment must be obeyed or fulfilled exactly, but it is sufficient if a directory enactment be obeyed or fulfilled substantially."
- 23 -
The two aspects were elaborately considered in the light of the principles enunciated in [PRECEDENT], [PRECEDENT], , [PRECEDENT], and [PRECEDENT], and answered as under :
"A provision in a statute or notification is mandatory or directory is dependent on the intent of the Legislature. This intention can be gathered from the object of the statute, the purpose of which the provision has been inserted, the setting in which it appears, and the consequences which would follow by adopting a construction one way or the other. This is thus an ordinary rule of construction which, without doing violence to the language used, achieves the object sought to be realised.
A distinction for the purpose of interpretation, has to be made between the charging provisions in a taxing statute and the provisions relating to the machinery for quantification and collection of tax. The charging section has to be construed with reference only to the language employed in
- 24 -
the statute, for, "there is no room for intendment; there is no equity about a tax; there is no presumption as to a tax" and nothing is to be read in and nothing is to be implied". Different considerations however arise when the machinery provisions in a taxing measure have to be construed, when the Court is not bound to adopt a strict interpretation confining the application of the provision to the letter of the law, but can traverse beyond the language used and ascertain whether the machinery is workable to effectuate the enforcement of the charge created under the Act The ordinary rules of construction apply to the machinery provisions in a taxing statute and it is open to the Court to consider whether any or all the provisions relating to the procedure and the machinery for collection of tax are mandatory or directory."
Applying the above principles to the provisions of the notification in question, it was concluded that the provision regarding the production of the verification certificate was mandatory and the provision prescribing time limit for production of
- 25 -
the verification certificates could be construed only as directory".
28. In the present set of facts, the respondents have not alleged any misuse of the export permits and the quantity of exported liquor did not reach the destinations. It is the specific case of the petitioners that the EVCs were submitted belatedly beyond the period of time prescribed and thus the same are rejected. For the Excise year 2018-19, out of about 1,405 export permits said to have been issued, approximately in 51 cases, EVCs were submitted belatedly for which explanation offered shows that destination States issued the EVCs belatedly due to various factors which was beyond the control of the petitioner and the same can not be rejected outrightly. As could be seen, furnishing of verification certificates is only for proof of the export and the quantity exported.
- 26 -
[SECTION]. In the light of the observations made by the High Courts of Kerala and Andra Pradesh referred to [ENTITY], vis vis the provisions of the [ACT] and the Export Rules, this Court is of the considered opinion that production of EVCs is mandatory to avail the benefit of reduced duty pursuant to export of liquor to other States. Some proof is necessary to substantiate the liquor exported has reached the destination/other States. However, describing the time limit of sixty/ninety days for production of EVCs can be held to be directory, since the production of such EVCs within the prescribed period is dependant on the functioning of the authorities of different States, which is beyond the control of the person exporting the liquor. Any EVCs submitted beyond the prescribed period with sufficient cause shown requires to be considered, if it is otherwise established that the liquor was exported to other States by adequate material evidence. No straight jacket
- 27 -
formula can be fixed for consideration of the sufficient cause or satisfactory explanation offered by the person exporting the liquor, the same depends on the facts and circumstances of the case. In such circumstances, credit has to be adjusted depending upon the facts and circumstances of the case. Furnishing of such EVCs belatedly would not disentitle the petitioner to avail the reduced rate of duty to which he is otherwise entitled to. Unless such a pragmatic approach is taken, the condition of fulfilling of furnishing EVCs within the time limit as prescribed would render the provision unworkable and redundant.
30. Further, adverting to the arguments of the learned Additional Government Advocate inasmuch as the interpretation of the word 'shall' employed in the [SECTION], it is apt to refer to the judgment of the Hon'ble Apex Court in the case of [ENTITY] & another supra, whereby the Hon'ble
- 28 -
Apex Court, has laid down the principles while interpreting the word "shall" and the same is quoted hereunder:
"Ordinarily the use of the word 'shall' prima facie indicates that the provision is imperative in character. However, by a catena of decisions, it is well-established that the court while considering whether the mere use of the word 'shall' would make the provision imperative, it would ascertain the intendment of the legislature and the consequences flowing from its own construction of the word 'shall'. If the use of the word 'shall' makes the provision imperative, the inevitable consequence that flows from it is that the court would be powerless to grant any relief even where the justice of the case so demands. If the word 'shall' is treated as mandatory the net effect would be that even where the default in complying with the direction given by the court is technical, fortuitous, unintended or on account of circumstances beyond the control of the defaulter, yet the court would not be able to grant any relief or assistance to such a person. Once a default is found to be of a very technical nature in complying with the earlier order, the court must have power to relieve against a drastic
- [SECTION] -
consequence all the more so if it is satisfied that there was a formal or technical default in complying with its order. To illustrate, if the tenant while he has on the way to the court on the 15th day to deposit the rent for the just preceding month as directed by an order under [SECTION], met with an accident on the road and could not reach the court before the court hours were over, should he be penalised by his defence being struck off. Even if the court is satisfied that he was on the way to the court to make the necessary deposit, that he had the requisite amount with him, and that he started in time to reach the court within the prescribed court hours and yet by circumstances beyond his control, he met with an accident would the court be powerless to grant him relief? This illustration would suffice to the intendment of the legislature that it never used the word 'shall' to make it so imperative as to render the court powerless."
31. The question whether the expression 'shall' partakes the character of 'may' depends upon the intent of legislation, which requires to be achieved not only from the phraseology of the provision, but considering
- 30 -
its nature, design and the consequences. Applying this principle, the word 'shall' used in [SECTION] requires to be read as 'may'. Adopting such a construction, [SECTION] has to be read. The principle of the rules would govern to achieve its object and intent particularly, to make it workable. Any other interpretation would invalidate the provision as hit by [SECTION] of the [ACT].
32. Hence, the following:
ORDER
i) Furnishing of EVC Forms in terms of [SECTION] of the Export Rules is mandatory, but the time prescribed of sixty/ninety days (defence supplies) for furnishing of such EVC Forms is merely directory.
Subject to the same, [SECTION] of the Export Rules is held to be intra vires the [ACT].
- 31 -
ii) Accordingly, demand of excise duty as per Annexure - A dated 11.02.2019 stands quashed.
iii) The action of the respondents to invoke the bank guarantee furnished by the petitioners is held to be unjustifiable.
iv) Respondents shall process the petitioner's application for export permits and issue the pending export permits, if any, subject to satisfying the other conditions prescribed.
Writ petitions stand disposed of, in terms of the above.
In view of disposal of the writ petitions, pending I.As. also stand disposed of.
JUDGE PMR/psg*