Case: State Of U.P.  Vs. Vam Organic Chemicals Ltd.

2. A series of writ petitions were filed by the respondents in the Allahabad High Court challenging a notification dated 13th January 1990 whereby licence fee of 15 paise per litre was sought to be imposed on the quantity of specially denatured spirit (SDS) obtained from distilleries in Uttar Pradesh under Rule 3(a) of the U.P. Licences for the Possession of Denatured Spirit and Specially Denatured Spirit Rules, 1976. All the writ petitions were allowed by the High Court. The State has questioned the correctness of the decision in these appeals.3. The basic facts in all these appeals are substantially similar. Therefore, the facts in the case of Vam Organic Chemicals Ltd. and Anr. are taken as illustrative for the purpose of our decision.4. Themanufactures organic chemicals such as Acetic Acid, Acetic Anhydride and vinyl Acetate at its chemical plant. The main raw material for manufacture of these organic chemicals is Ethyl alcohol (Industrial grade) which in turn in produced from molasses. In 1982, the respondent set up its own distillery for producing the industrial alcohol. The distillery is registered under the provisions of the Industries (Development and Regulation) Act, 1951. The entire production of industrial alcohol at the respondents distillery as well as industrial alcohol from outside sources is used at its chemical plant for producing the organic chemicals mentioned earlier. The entire quantity of industrial alcohol is denatured" before it leaves the respondents distillery and carried in pipes to the chemical plant. It is this denatured industrial alcohol which is subjected to the disputed levy.5. The levy of the disputed licence fee is legislatively traceable to the UP Excise Act, 1910. This Act provides for the control of and levy of excise duty on intoxicating liquor and on intoxicating drugs in the State of Uttar Pradesh. The word intoxicant has been defined under Section 3(13) of the Act as meaning any liquor or intoxicating drug. Liquor has in turn been defined in Section 3(11) as meaning intoxicating liquor and includes spirits of wine, spirit, wine, tari, pachwai, beer and all liquid consisting of or containing alcohol, also any substance which the State Government may be notification declare to be liquor for the purposes of this Act.6. Industrial alcohol with which we are now concerned is not liquor nor is it potable as such. However, it may be utilised to produce a kind of liquor if it is denatured. Denatured according to the definition of the word in section 3(9) of the Actunfit for human consumption in such manner as may be prescribed by the State Government by notification in this behalf".The denaturants and their specification and the manner of denaturation have been prescribed by the State Government. Separate premises previously approved for the purpose by the Excise Commissioner are required to be provided for the process of denaturation and for the storage of denaturing agents and the vessels and receptacles used in the process. Denaturation must take place in these premises only and issue and storage of denatured spirit can only be made from or in these premises. The premises are to be secured by an excise lock, and denaturation is to take place under the direct supervision of the(see para 784 of the U.P. Excise Manual). After the denaturation the emerging product is to be further tested in the manner specified by the Excise autorities. If the alcohol has not been satisfactorily denatured it is to be destroyed (vide paragraph 785 ibid). It is not in dispute that the respondent has followed all these regulatory measures.8. To ensure the denaturation of industrial alcohol, in exercise of the powers under Section 41 of the 1910 Act, the Uttar Pradesh Licences for the Possession of Denatured Spirit and Specially Denatured Spirit Rules, 1976 (hereinafter referred to as the Rules) were made. Rule 2 initially only provided for the three types of licences which are required for the possession of denatured spirit including specially denatured spirit for industrial purposes, namely, licences in form1. The respondents herein are all holders of licences in Formwhich is granted for the possession of denatured spirit for use in industries in which the alcohol is destroyed or converted chemically in the process into any other product and the product does not contain alcohol such as Ether, Styrene, Butadiene, Acetone, Polythene etc.

Court's reasoning:
g the various authorities cited, we are of the view that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the State is deprived of revenue on the sale of such potable alcohol and the public is protected from consuming such illicit liquor. But this power stops with the denaturation of the industrial alcohol. Denatured spirit has been held in Vam Organics I, to be outside the seisin of the State Legislature. Assuming that the denatured spirit may by whatever process be renatured, (a proposition which is seriously disputed by the respondents) and then converted into potable liquor this would not give the State the power to regulate it. Even according to the demarcation of the fields of legislative competence as envisaged in Bihar Distillery, industrial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery "denatured spirit, of course, is wholly and exclusively industrial alcohol".Besides, the fee is required to be justified with reference to the cost of such regulation. The industry is already paying a fee under Rule 2 for such regulation. Indeed the justification for levying the fee under Rule 3(a) is the identical justification given by the State for levying the fee under Rule 2. Presumably, a full complement of Excise Officers and staff are appointed by the State in the Excise Department to carry out their duties under the Act to oversee, control and keep duty on the various kinds of intoxicants under the Act. Having regard to the decision in Vam Organics I, we must also assume that apart from the normal strength, additional officers and staff were appointed to regulate the denaturation of the industrial alcohol. There is nothing to show that there has been any deployment of any additional staff tothe possibility of renaturation of the denatured spirit.The question is (to borrow the language in Synthetics) whether in the garb of regulations a legislation which is in pith and substance, as we look upon the instant legislation, a fee or levy which has no connection with the cost or expenses administering the regulation, can be imposed purely as a regulatory measure.Judged by the pith and substance of the impugned legislation, we are definitely of the opinion that these levies cannot be treated as part of regulatory measures." The State has not produced any material to show that it was incurring any additional cost for any further regulation of denatured spirit. Any trace of a lingering doubt as to the propriety of the levy under Rule 3(a) must be taken to have been noted off effectively with the order passed by three Judges of this Court in the Writ Petition filed by Synthetics challenging the same levy as we have noted earlier. That order has resulted in granting Synthetics & Chemicals Ltd. relief from payment under Rule 3(a). The only distinction between the present respondents cases and Synthetics was that the respondents chose to challenge the levy before the High Court. That could be no rational basis for denying the respondents who are otherwise identically situated, the same relief. [See: Anil Kumar Neotia vs. Union of India (1998) 2 SCC 587]. In the absence of any such correlation the fee under Rule 3 is not a fee at all levied for the purpose of additional regulation or for any service rendered but is really a tax in the garb of a fee.45. The appeals must therefore be and are hereby dismissed. It appears from the records that since 1982 the High Court had passed interim orders in the series of writ petitions filed by the respondents challenging the validity of the imposition of the licence fee, staying the impugned levy. Separate writ petitions were filed in respect of the assessment years and interim orders obtained in respect of each year. For the excise yearinitially an order was passed staying the levy of the impugned licence fee subject to the respondents furnishing adequate security. This order was clarified on 2.9.1984 by allowing the respondents to furnish bank guarantee in respect of the licence fee for the excise year in question subject to which the levy was stayed. For the subsequent years the same interim order was passed. The respondent had therefore made no payment to the appellant of the licence fee but had furnished several bank guarantees which were kept renewed until the disposal of all the writ petitions by the High Court. After allowing the writ petition the High Court directed the discharge of the bank guarantees. Although this order was stayed when the appeal was admitted by this Court on 25.9.2000, there has been no collection of the disputed levy by the appellants. There is as such no question of any refund being directed of any amount by the appellant to the respondents. Where the levy itself has been held to be invalid, thecannot be permitted to realize the amount recovered by the bank guarantees (See: Somaiya Organics vs. State of U.P. (2001) 5 SCC 519 para 35).