Case: M/S. Khoday Distilleries Ltd Vs. State Of Karnataka

1. The Karnataka Excise Act, 1965 provides for the levy of duties on the manufacture, transport, purchase and sale, import and export of liquor and intoxicants. In exercise of the rule-making power conferred on the State under the Karnataka Excise Act, 1965 various rules have been framed by the State of Karnataka. We are concerned in these matters with the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968, the Karnataka Excise (Brewery) Rules, 1967, the Karnataka Excise (Distillery and Warehouse) Rules, 1967 and the Karnataka Excise (Manufacture of Wine from Grapes) Rules, 1968 as amended on 13-9-1989 by notifications issued by the State of Karnataka2. By reason of the amendments carried out in these Rules, a distributor licence is prescribed for the first time under Rule 3(11) of the amended Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968. Under Rule 3(11) a distributor licence shall be granted by the Excise Commissioner for the whole of the State or any part thereof to deal in the products of all distilleries, breweries or wineries in the State or to import liquor from outside the State for the purpose of distribution or sale within the State or any part of it, as may be specified in the licence. The licensee is required to establish not less than one depot in each district within the State or within that part of the State where it proposes to distribute or sell such liquor. What is more important for our purpose, the rule provides that a distributor licence shall be issued only to such company owned or controlled by the State Government as the State Government may specify. The other rules mentioned above have also been correspondingly amended to provide that the licensees under those Rules shall sell the liquor only to a holder of a distributor licence under the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968, subject to certain exceptions specified in each of these Rules. In other words, as a result of these amendments, a licensee either for manufacture or sale of liquor is prohibited from selling liquor to anyone other than the holder of a distributor licence. And the holder of such a licence can only be a company owned or controlled by the State Government, specified under the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968. The State Government has specified Mysore Sales International Ltd. (hereinafter referred to as MSIL) as a company so specified and has granted it the distributor licence3. The appellants challenged the validity of these amendments on various grounds. The challenge was repelled by the Karnataka High Court. Hence the present appeals and other matters have come before us. One of the main contentions raised by the appellants was : By compelling the appellants to sell liquor to MSIL and prohibiting them from selling liquor to anyone else, the State Government had violated their fundamental right under Article 19(1)(g) of the Constitution to carry on trade or business. They further contended that the restrictions placed by these amendments on their right to carry on trade were far from reasonable4. This issue relating to violation of the fundamental rights of the appellants under Article 19(1)(g) has already been negatived by this Court in the present cases in Khoday Distilleries Ltd. v. State of Karnataka [ 1995 (1) SCC 574 ]. It has been held (para 60) that the right to carry on any occupation, trade or business does not extend to carrying on trade or business in activities which are inherently pernicious or injurious to health, safety and welfare of the general public. This Court has further held that a citizen has no fundamental right to do trade or business in intoxicating liquor. Hence such trade or business in liquor can be completely prohibited. For the same reason, the State can create a monopoly either in itself or in the agency created by it, for the manufacture, possession, sale and distribution of liquor as a beverage and it can also sell licences to citizens for this purpose by charging fees. When the State permits trade or business in potable liquor with or without limitation, the citizen has the right to carry on trade or business only subject to the limitations so placed. After thus deciding the above question, the appeals, special leave petitions and writ petitions were directed to be placed before an appropriate Bench for decision of other questions arising in these matters5. Accordingly, these matters have been placed before usSLPs (C) Nos. 13817-13828 of 199323. These petitions are for leave to appeal against a judgment of the Andhra Pradesh High Court upholding the validity of the amendments made to sub-rule (2) of Rule 4 and sub-rule (2) of Rule 11 of the Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970 as also sub-rule (12) of Rule 66 of the Andhra Pradesh Distillery Rules, 1970 and Rule 34(2) of the Andhra Pradesh Brewery Rules, 1970. These Rules have been framed under the Andhra Pradesh Excise Act of 1968 in exercise of powers conferred by Section 72 of the Andhra Pradesh Excise Act of 1968. They were amended by GOMs No. 187 Revenue [Excise III(2) dated 18-3-1991]. These amendments were challenged before the Andhra Pradesh High Court on the ground that they violated the petitioners rights under Articles 14 and 19(1)(g) of the Constitution of India. These challenges have been negatived by the Andhra Pradesh High Court except for the retrospective operation of the amended Rules. The present petitions are for leave to appeal against this judgment and order of the Andhra Pradesh High Court. As a result of these amendments, the fee for the approval of any one variety of labels to be affixed on bottles of liquor is either enhanced from Rs 100 to Rs 25, 000 or fee of Rs 25, 000 for approval of labels is introduced for the first time. The approval has to be obtained every year. These amendments were challenged as violative of Articles 14 and 19(1)(g) of the Constitution

Reasoning: We do not think so. A distributor licence is basically not different from the licences so prescribed. In fact the licences cover the whole gamut of activities from manufacture to consumption of liquor. Clause (11) of the amended Rule 3 of the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 which prescribes a distributor licence refers to it as a licence to deal in the products of all distilleries or breweries or wineries in the State, or a licence to import liquor from outside the State for the purpose of distribution or sale within the State; or to export liquor outside the State. This is clearly a licence to deal in liquor in the above manner. The licence shall be in Form CL 11 and shall be subject to renewal each year at the discretion of the Excise Commissioner. The Form CL 11 prescribes the conditions of a distributor licence11. A distributor licence, therefore, is only a licence to deal in liquor by sale and purchase of liquor. This activity is not something different from what is contemplated under the Act itself or in respect of which the rule-making authority has been delegated to the State under Section 71. The mere fact that a monopoly of distributor licence is sought to be created, does not take the licence outside the ambit of the Act. The Act itself provides that the number of licences can be regulated by the State. If the State chooses to regulate licences by providing that the licence shall be granted only to a company owned by the State, it cannot be said that such a licence is something which is outside the purview of the Act or the rule-making authority of the State under the ActThe Act is clearly within the legislative competence of the State Legislature. Nobody has challenged it. The amended Rules are within the scope of the delegated authority under Section 71. If the main Act is within the legislative competence of the State Legislature and the Rules have been framed under a validly delegated authority and are within the scope of that authority, we fail to see how the Rules can be challenged on the ground of lack of legislative competence. If the Act is valid, so are the RulesAlthough the protection of Article 19(1)(g) may not be available to the appellants, the rules must, undoubtedly, satisfy the test of Article 14, which is a guarantee against arbitrary action. However, one must bear in mind that what is being challenged here under Article 14 is not executive action but delegated legislation. The tests of arbitrary action which apply to executive actions do not necessarily apply to delegated legislation. In order that delegated legislation can be struck down, such legislation must be manifestly arbitrary; a law which could not be reasonably expected to emanate from an authority delegated with the law-making power. In the case of Indian Express Newspapers (Bombay) (P) Ltd. v. Union of India [ 1985 (1) SCC 641 : 1985 SCC(Tax) 121 : 1985 (2) SCR 287 ] (SCR at p. 243) this Court said that a piece of subordinate legislation does not carry the same degree of immunity which is enjoyed by a statute passed by a competent legislature. A subordinate legislation may be questioned under Article 14 on the ground that it is unreasonable; unreasonable not in the sense of not being reasonable, but in the sense that it is manifestly arbitrary. Drawing a comparison between the law in England and in India, the Court further observed that in England the Judges would say, Parliament never intended the authority to make such Rules; they are unreasonable and ultra vires. In India, arbitrariness is not a separate ground since it will come within the embargo of Article 14 of the Constitution. But subordinate legislation must be so arbitrary that it could not be said to be in conformity with the statute or that it offends Article 14 of the ConstitutionThis Court has held that though there is no fundamental right in a citizen to carry on trade or business in liquor; and the State under its regulatory power has the power to prohibit absolutely every form of activity in relation to intoxicants such as its manufacture, storage, export, import, sale and possession; nevertheless when the State decides to grant such right or privilege to others, the State cannot escape the rigour of Article 1415. In the present case, therefore, we must examine whether there is any manifest arbitrariness in prescribing a distributor licence which can be granted only to a company owned by the State; and in compelling the appellants to sell their product to the distributor. The appellants have pointed out that the amendments must be considered as arbitrary because they cause undue hardship to all those who are concerned with the manufacture and sale of liquor. They point out that although the manufacturers are obliged to sell their commodity to the MSIL, there is no corresponding obligation cast on the MSIL to buy the liquor manufactured by the manufacturers in the State of Karnataka. In the absence of such an obligation on the MSIL to buy the liquor, it can well happen that MSIL may act arbitrarily or capriciously and may purchase or not purchase liquor from the manufacturers at its own sweet will. This would seriously affect the business of all those engaged in the manufacture and sale of liquor. This apprehension does not appear to be justified. In the Statement of Objections on behalf of the State Excise Commissioner which were filed before the High Court of Karnataka, the respondents have explained in para 16 that it is not correct to state that the government company is at liberty to purchase or not to purchase the liquor produced by the petitioners. It is bound to purchase the liquor if there is demand from the wholesalers. Even otherwise it has been submitted that proper guidelines will be issued to the government company in this behalf. The government company is expected to act bona fide and with responsibility and it is not correct to contend that the government agency will be interested only in a particular manufacturer. This submission has considerable force. What is more important, during the period that these appeals were pending before us, MSIL has not merely established several depots but has carried on distribution of liquor in the State of Karnataka on a large scale. The learned counsel appearing for the respondents have stated before us that MSIL receives orders for supply from various purchasers. These orders specify the brand of liquor and the company from which the supplies are required. Accordingly MSIL places orders with the companies concerned for the brands of liquor which are demanded by their purchasers. It is on the basis of these demand requisitions received by MSIL that MSIL places orders. There is, therefore, no question of any hardship being caused to the appellants by reason of the fact that their sales have to be channelled through an intermediary. Depending upon the orders received by the MSIL, it in turn, places orders with the suppliers or manufacturers concerned. The business activity of the appellants cannot, therefore, be said to be curtailed in any manner. Nor can there be any hardship on the appellants. Once the Rules oblige the manufacturers to supply their product only to the company holding the distributor licence, a corresponding duty is cast on the distributor to place orders with the suppliers concerned whenever demand for a particular product is received by it17. The second ground of hardship which is pointed out relates to excise duty. Under the Karnataka Excise (Excise Duties and Privileges Fee) Rules, 1968 a rebate in excise duty is given in respect of liquor which is either exported outside India or is exported to another State within India. This makes the liquor sold outside the State or exported considerably cheaper since it bears less incidence of excise duty. Under the present scheme, however, all these sales are converted into local sales because the sale must be made to MSIL who, in turn, will either export it, if it has received an export order, or will export it to a place within India but outside the State. In both these cases, since the first sale will be within the State to MSIL, a substantial rebate in excise will be lost and the goods manufactured by the appellants will become far more expensive and, therefore, will become much less competitive in the outside market. There is a similar provision relating to rebate in sales tax which also the appellants will lose. There is no doubt that this will cause some hardship to the appellants. The fact, however, remains that any concession which is granted by the State for export sales or inter-State sales is a matter of policy. Granting of such concession or absence of such concession cannot make the rule itself manifestly arbitrary or unreasonable. If the appellants are aggrieved by the existing Rules or would like a similar concession to be extended to sales which are to be made to MSIL in respect of export orders or orders for supply outside the State received by it, it is open to them to make a suitable representation to the State Government. The absence of availability of such a concession, however, cannot make the Rules arbitrary or violative of Article 14. All manufacturers and suppliers within the State of Karnataka are governed by the same Rules and will, therefore, have to pay the same taxes. All persons who are similarly situated are similarly affected by the amended Rules. There is, therefore, no discrimination under Article 14 in its traditional senseTherefore, the exclusive right or privilege of manufacture, storage, sale, import and export of liquor through any agency other than the State would be subject to the rigours of Article 14. We respectfully agree with these observations. In the present case, however, there is no violation of Article 14How such evasion is to be checked, however, is a matter of policy. So long as the policy as formulated in the amended Rules is not manifestly arbitrary or wholly unreasonable, it cannot be considered as violative of Article 14. There is, in the present case, no self-evident disproportionality between the object to be achieved and the Rules which have been framedThis plea was raised before the Karnataka High Court at a time when MSIL had not started functioning. It is now a fully functional authority. MSIL has stated that it has a large number of depots in various districts of the State and is already handling very substantial business. This plea, therefore, merits no further consideration. In any event, some problems with the discharge of its duties by MSIL will not render the amended Rules providing for a distributor licence arbitrary or violative of Article 14Thus the State Government is authorised to levy fees for various kinds of permits or licences which may be required for activities connected with the manufacture, supply or sale of liquor. Labelling of liquor bottles with brand labels is an essential activity connected with the sale and distribution of different varieties of liquor manufactured in the State by different manufacturers or imported into or exported outside the State. Different varieties of liquor produced by various manufacturers are thus identified for purchase or sale. It is, therefore, permissible for the State Government under the Andhra Pradesh Excise Act, 1968 to levy fees for approval of different varieties of labels to be affixed to liquor bottles for the purpose of distribution and sale of liquor. The amendments are within the rule-making power of the State Government. In fact prior to these amendments, a fee of Rs 100 was being charged for approval of labels. It is nobodys case that the fee was beyond the rule-making power under Section 72 of the ActSLPs (C) Nos. 13817-13828 of 199326. It is also contended that the fee of Rs 25, 000 for the approval of any one variety of labels is exorbitant and totally disproportionate to the work involved.Therefore, such levy violates Article 14. But, in this connection, it is necessary to bear in mind that the State under its regulatory powers has the right even to prohibit absolutely every form of activity in relation to intoxicants, its manufactures, storage, export, import, sale or possession. In all these respects the right to regulate these activities or to carry on these activities vests in the State. When, therefore, such rights and parted with, it is open to the State to part with such rights for a consideration. The fee for approval of labels is an aspect of the right to sell or distribute liquor which right the State Government has parted with for consideration in the form of a fee. The increase in the fee from Rs 100 to Rs 25, 000 may appear, at first glance, to be exorbitant. But it constitutes an extremely small percentage of the total turnover of various products to which these labels are affixed. The fee for approval cannot, therefore, be considered as exorbitant or its imposition wholly arbitrary. It is not the case of the petitioners that their trade in liquor is seriously affected by the levy of this increased fee. In the case of Har Shankar v. Dy. Excise & Taxation Commr. [ 1975 (1) SCC 737 : 1975 (3) SCR 254 ] (SCR at p. 278) this Court upheld the right of the State to prohibit absolutely all forms of activities in relation to intoxicants. It said that the wider right to prohibit absolutely would include the narrower right to permit dealing in intoxicants on such terms of general application as the State deems expedient. The Court said that the Government has the power to charge a price for parting with its rights. It also further observed that the licence fee which the State Government charged to the licensee through the medium of auctions or the fixed fee which was charged to the vendors of foreign liquor holding licences need bear no quid pro quo to the services rendered to the licensees. The word fee in this context is not used in the technical sense of the expression. By licence fee or fixed fee is meant the price or consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees. As the State can carry on a trade or business, such a charge is the normal incidence of a trading or business transaction. The contention, therefore, of the petitioners that there is no quid pro quo between the increased label fee and the services rendered also has no merit. It is based upon a misconception of the nature of the levy