Case: State of Uttar Pradesh &amp; Others Vs. Delhi Cloth Mill &amp; Another

The State of U.P. by special leave appeals from the judgment of the High Court of Allahabad dated October 26, 1979, allowing the respondents writ petition and holding that the State of U.P. and the excise authorities were not entitled to levy excise duty on the wastage of liquor in transit. The respondents are manufacturers of high strength spirit classified as other sorts of spirit not otherwise specified under Section 28 of the United Provinces Excise Act, 1910, hereinafter referred to as the Act. After manufacture they transport those spirits in big containers from the distilleries to their warehouses, transporting them on passes issued under Section 16 of the Act. In the bonded warehouses the same are sometimes diluted, separately bottled and sold. They also used to manufacture and bottle military rum under a licence and supply the same to the defence personnel inside and outside the State of U.P. The Officer Commanding Rail Head Depot A.S.C., Pathankot having obtained permits from the State of Punjab for the import of military rum, against those permits the respondents exported on military rum from their distillery, under different passes. The excise duty on military rum for export was Rs. 7 per L.P. litre while the rate for consumption within the State was Rs. 21 per cent L.P. litre. If the exported military rum was under bond thereupon duty was realised by the importing State from the importer thereof. The respondents bottled the rum according to rules and supplied the same to the consignees at the distillery premises and the consignments were taken by the consignees under the seal of the railway authorities to their respective destinations2. It appears by Notification dated March 26, 1979 in exercise of the powers under Sections 28 and 29 of the Act, read with Section 21 of the U.P. General Clauses Act, 1904, and in supersession of the earlier government notification the Governor was pleased to direct that with effect from April 1, 1979 duty shall be imposed on country spirit at the rates specified in the schedule thereto and the duty was payable "before the issue from the distillery or bonded warehouse concerned save in the case of issue under bond". By order dated October 13, 1970 notice was issued to the respondents demanding Rs. 4295.55 on the wastage which was termed as "excess transit wastage" of rum calculated at the maximum rate of Rs. 21 per L.P. litre. A representation of the respondents dated November 9, 1970 was rejected by order dated January 15, 1972. Another representation through the All India Distillers Association was also rejected by order dated August 28, 19723. Several writ petitions challenging similar orders were filed by others before the Allahabad High Court for quashing the orders. The respondents also filed Civil Miscellaneous Writ No. 7168 of 1972 under Article 226 of the Constitution of India praying for appropriate writ, order or direction quashing the impugned orders dated October 13, 1970, November 9, 1970, January 15, 1972 and August 28, 1972 and for a mandamus commanding the State of U.P. not to realise or adjust any amount to duty towards wastage from the respondents advance duty account otherwise than in accordance with law and restraining them from giving effect to the impugned orders. The High Court by the impugned judgment dated October 26, 1979 relying on an earlier Division Bench decision of the same High Court in Mohan Meakin Breweries Ltd. v. State of U.P. (W.P. No. 2604 of 1973, decided on September 11, 1979 (All)) allowed the writ petition and quashed the impugned orders thereby holding that no excise duty could legally be levied on the excess wastage that occurred during the transport of liquor in course of export, that is, taking out of U.P. otherwise than across a customs frontier as defined by the Central Government

Court's reasoning:
21. The fact that the importer is required to pay countervailing duty on the imported military rum could, therefore ipso facto be no ground for opposing the levy of differential duty on the excess wastage of exported rum that duty being levied with a view to safeguard the excise revenue of the exporting State. If the excess wastage was actually lost to consumers while in the importing State no justification of such a duty may arise, that, however, would be an entirely different question without in any way affecting the competence of the legislature of the exporting State to impose such a duty. The fact that the exported rum was on payment of export duty or on bond would not again be material inasmuch as when the rum meant for export failed to be exported, there may be a presumption, may be rebuttable one, that what is shown as the excess has merged in mass of rum consumed within the State and was not separated from such a mass. The imposition of differential duty was only deferred to this moment and it still continued to be a duty on production or manufacture of rum. It could not be regarded as a duty not connected with the taxable event of manufacture or production22. There is also no similarity with the excise duty sought to be levied only on the unlifted quantity of liquor by contractors which was held to be impermissible under Sections 28 and 29 of the Act in Excise Commissioner, U.P. v. Ram Kumar ( 1976 (3) SCC 540 : 1976 SCC(Tax) 360) and State of M.P. v. Firm Gappulal ( 1976 (1) SCC 791 : 1976 SCC(Tax) 71 : 1976 AIR(SC) 633 : 1976 (2) SCR 1041 ). In the instant case the military rum was obtained for the purpose of export and the lower export duty was paid and only when the rum did not result in export the question of imposing the differential duty arose. The notion of the excise duty being changed or cancelled on account of what transpires later is not foreign to excise law. Generally speaking the imposing of the differential duty i.e. charging up the duty on the report of the excess wastage is the opposite of the system of drawback prevalent in some systems. Drawback means the repayment of duties or taxes previously charged on commodities, from which they are relieved on exportation. For example, in the customs laws of some countries an allowance is made by the government upon the duties due on imported merchandise when the importer, instead of selling it within the country re-exports it, and then the difference of the duty is refunded, if already paid. Similarly, in England there is a provision of refund of duties on British wine when the wine incidentally is spoilt or otherwise unfit for use or when delivered to another person has been returned to the maker as so spoilt or unfit. The system of charging up the duty on the sub-sequent event of non-export cannot, therefore, be said be irrespective of production or manufacture23. In the instant case if it is proved to the satisfaction of the appropriate authorities that countervailing duty had been paid on the entire consignment irrespective of the wastage then the question would arise as to whether the wastage could be ignored altogether by the exporting State as was done by the importing State. Counsel for the parties had no objection to the idea that if the explanation for wastage was satisfactory and the countervailing duty was paid in the importing State on the entire consignment irrespective of the wastage, there would be room for adjustment by reducing the duty to similar extent