Case: State of Uttar Pradesh and Another Vs. Synthetics and Chemicals Limited and Another

2. This appeal is brought by the State of Uttar Pradesh against the judgment of the Allahabad High Court in Civil Miscellaneous Writ Petition No. 361 of 1976. The High Court, allowing the writ petition, declared the Uttar Pradesh Sales of Motor Spirit, Diesel Oil and Alcohol Taxation (Amendment) Act, 1976 (U.P. Act 8 of 1976) to be null and void insofar as it purported to levy purchase tax on industrial alcohol. By this Act,(1) of Section 3 of the United Provinces Sales of Motor Spirit, Diesel Oil and Alcohol Taxation Act, 1939 was amended, so as to substitute the following(1) There shall be levied with effect from May 2, 1974(a) * * *(b) at the point of first purchase of alcohol in the State, a tax at the rate of 40 paise per litre for the first million litres and at the rate of 20 paise per litre for the reminder, payable by the purchaser, and which shall be collected and paid in the prescribed manner to the State Government :..." *This levy was sought to be justified by the State, when challenged in the writ proceeding, as a valid exercise of its legislative power on a matter falling under Entry 54 of List II of the Seventh Schedule of the Constitution. The writ petitioners, challenging the levy, contended that the State legislature was incompetent to levy tax with reference to Entry 54 of List II in respect of industrial alcohol insofar as that article was the subject of regulation by the Central Government in exercise of its power under Sectionof the Industries (Development and Regulation) Act, 1951 (Act 65 of 1951) (hereinafter referred to as the IDR Act) and that the price of that Article was regulated by the relevant Price Control Orders made by the Central Government under the said Act. Any levy of sales tax or purchase tax by the State by recourse to Entry 54 of List II, it was contended, would come into direct conflict with the law made by Parliament and the control exercised by the Central Government under that law in regard to an industry falling under Entry 52 of List I read with Entry 33 of List III. The writ petitioners, relying upon the decision of a Constitution Bench of this Court in Synthetics and Chemicals Ltd. v. State of U.P. ( 1990 (1) SCC 109 ) contended before the High Court that, insofar as industrial alcohol was concerned, the State was incompetent to levy sales tax by reason of the operation of the Ethyl Alcohol (Price Control) Orders made by the Central Government in exercise of its power under Sectionof the IDR Act3. The State contended before the High Court that the aforesaid decision of this Court did not deal with any levy of tax falling under Entry 54 of List II. The power of the State to levy taxes on the sale or purchase of goods was not the subject of consideration in that decision. What was considered was the power of the State to collect vend fee or transport fee or the like by recourse to Entry 8 of 51 of List II with reference to the production, manufacture, possession, transport, purchase and sale of industrial alcohol during the operation of the IDR Act 6 and the rules made thereunder4. The High Court accepted the contention of the writ petitioners and held that the impugned purchase tax, if allowed to be levied on industrial alcohol, would have the effect or raising its price beyond the limit prescribed under the Price Control Orders made by the Central Government in relation to industrial alcohol in exercise of its power under the IDR Act. The High Court accordingly declared that the impugned levy of purchase tax on industrial alcohol was, during the operation of the Price Control Orders of the Central Government, beyond the legislative competence of the State5. In Synthetics ( 1990 (1) SCC 109 ) this Court held that vend fee, transport fee and the like levied by Uttar Pradesh, Maharashtra and certain other States by recourse to Entry 8 or Entry 51 of List II were null and void insofar as such impost came into direct conflict with the exercise of power by the Centre for the control of supply, distribution, price, etc. of industrial alcohol under Sectionof the IDR Act and the rules or orders made thereunder. That case was apparently not concerned with the exercise of legislative power with reference to Entry 54 of List II which reads"54. Taxes on the sale or purchase of goods other than newspapers, subject to the provisions of Entryof List I."Significantly, this entry shows that, subject to Entryof List I, taxes on the sale or purchase of goods (other than newspapers) taking place within the State are the exclusive preserve of the State. The only restriction on this legislative power is what is stated in Article 286. Nevertheless, in the concluding portion of the judgment, Sabyasachi Mukharji, J. (as he then was) stated : (SCC p. 158, para 86)The position with regard to the control of alcohol industry has undergone material and significant change after the amendment of 1956 to the IDR Act. After the amendment, the State is left with only the following powers to legislative of alcohol(a) It may pass any legislation in the nature of prohibition of potable liquor referable to Entry 6 of List II and regulating powers(b) It may lay down regulation to ensure thatalcohol is not diverted and misused as a substitute for potable alcohol(c) The State may charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol in the present case, because under the Ethyl Alcohol (Price Control) Orders, sales tax cannot be charged by the State on industrial alcohol(d) However, in case State is rendering any service, as distance from its claim ofgrant of privilege, it may charge fees on quid pro quo."6. So stating, the earlier decision of this Court in State of U.P. v. SyntheticsChemicals Ltd. ( 1980 (2) SCC 441 : 1989 (2) SCR 531) so far as it related to industrial alcohol, was overruled, but only prospectively, so as not affect collection of taxes already made. While invalidating the fees levied under various enactments challenged in Synthetics ( 1990 (1) SCC 109 ), (including the transport fee levied under the Bombay Prohibition Act, 1949 and the vend fee levied by the State of Uttar Pradesh in respect of industrial alcohol) to the extent that such levies were unsupported by quid pro quo, this Court also held, as seen above, that sales tax could not be charged on industrial alcohol because of the Ethyl Alcohol (Price Control) Orders7. Vend fee or transport fee was collected by various States purportedly in exercise of the power referable to Entry 8 of List II. The fee was at time sought to be levied under the Excise Rules made under the Excise Act and extended to potable alcohol and industrial alcohol alike. Though the fee was collected supposedly in return for service rendered, it was more often than not the price of licence to deal in what is otherwise the exclusive privilege of the State8. No citizen has a fundamental right to deal in intoxicating liquors and it is the right of the State to control production, manufacture, sale, etc. of such liquors with a view to even prohibiting the trade. The term intoxicating liquors was so widely interpreted in decisions like Synthetics ( 1980 (2) SCC 441 : 1980 (2) SCR 531 ) that State interference by way of controlalbeit as vend fee or transport feeof trade inalcohol was challenged as a challenged as a transgression on the area reserved for Parliament in respect of a controlled industry (see Entry 52 List I) and as repugnant to the control exercised by the Centre as regards the products of such a controlled industry (see Entry III). The challenge was specifically on the ground that the levy of fees could not be justified except within the bounds of Entry 8 of List II which is a subject of legislation limited to potable alcohol, but not a taxing entry, and of Entry 51 of List II which relates to duties of excise on alcoholic liquors for human consumption, but excluding medicinal and toilet preparations containing alcohol. The contention was that no fee or duty could be levied by the States in respect of industrial alcohol. This contention was accepted by this Court in Synthetics ( 1990 (1) SCC 109 ) as correct provided the levy of fees in respect of industrial alcohol was unsupported by quid pro quo. In other words, although Entry 66 of List II justified collection of fees in respect of matters falling in that List, levy of any such fee, by reason of the limitation of the entries in that List concerning alcohol, had to be confined to potable liquor and could not be extended to industrial alcohol unless there was quid pro quo. This was the rationale of the challenge in Synthetics ( 1990 (1) SCC 109 ) and the crux of the ratio decidendi of that decision. It was never contended by the States that the vend fee was a tax referable to Entry 54 of List II or the transport fee imposed by the Prohibition Act and the Rules was a levy under Entry 56 of List II. The Bombay Rectified Spirit (Transport in Bond) Second Amendment Rules, 1981 (made under the Bombay Probation Act, 1949) was challenged precisely for the reason that it was an invalid collection of fee amounting to an impermissible interference with the Central control of industrial alcohol. This Court, as seen above, upheld the challenge insofar as industrial alcohol was concerned, unless there was quid pro quo

Court's reasoning:
In our opinion the said observations must be understood as reiterating the principles enunciated by this Court in the decision afore-cited. Mr. Salve, learned counsel for the State of Uttar Pradesh submitted that before manufacturing industrial alcohol, the Respondent-company has to manufacture rectified spirit and that rectified spirit can be coverted into potable liquor by merely adding water. May be so. The observations made by the High Court and the law laid down by this Court recognise and safeguard the power of the State Government to guard against such abuse. WWe are, however, of the opinion that the said direction cannot be construed and shall no t be understood, as calling upon or directing the Government to do anything, or to make any supplies, contrary to the Provisions of the Molasses control order or any other law governing the supply of molasses. The supply of molasses to the Respondent shall be made in accordance with law.