Captive Consumption of Molasses in India: Excise, Control and Judicial Responses

Captive Consumption of Molasses in India: Excise, Control and Judicial Responses

1. Introduction

Molasses, though only a by-product of the sugar industry, lies at the intersection of multiple regulatory regimes in India—Central Excise, State molasses control statutes, environmental norms, and fiscal legislation. When sugar mills divert molasses to their own distilleries (“captive consumption”), disputes often arise regarding duty liability, reservation obligations for country-liquor manufacturers, valuation methodology, and permissible storage losses. This article undertakes a doctrinal and policy analysis of the Indian law on molasses captive consumption, synthesising leading Supreme Court and tribunal authorities with the relevant statutory framework.

2. Legislative and Regulatory Framework

2.1 Central Legislation

  • Central Excise Act, 1944—Section 3 levies excise duty on “manufacture”. Molasses classifies under heading 17.03 of the Central Excise Tariff.
  • Central Excise Rules, 2002—Rule 21 allows remission where goods are unfit for consumption; Rule 8 read with CBIC Circular 35/88-CX.8 clarifies valuation for captive consumption.

2.2 State Control Statutes

  • Uttar Pradesh Sheera Niyantran Adhiniyam, 1964 (“UP Molasses Act”)—Section 8 empowers the Controller to reserve molasses for country-liquor distilleries.
  • Bihar Molasses (Control) Act, 1947—Sections 8-C and 13(ff) authorise rules on storage funds, emphasised in New Swadeshi Sugar Mills.[1]

3. Conceptualising Captive Consumption

“Captive consumption” denotes intra-factory transfer of molasses to an associated distillery without sale. Two recurrent issues emerge:

  1. Levy and valuation of central excise duty: Because valuation rules presume a sale, notional or comparable prices must be devised when the transfer is internal.
  2. State reservation policies: Several States, notably Uttar Pradesh, mandate that a percentage of molasses production be made available to country-liquor manufacturers. The tension is acute where in-house distilleries claim the entirety of production.

4. Excise Duty on Captive Consumption

4.1 Judicial Treatment

The leading Supreme Court decision Oudh Sugar Mills Ltd v. Union of India[2] quashed a demand predicated on speculative production estimates, reaffirming that excise liability must rest on verifiable data. The Court’s insistence on “tangible evidence” continues to inform later tribunal decisions dealing with storage losses and deterioration (e.g., UP State Sugar Corporation v. CCE, 2012 CESTAT).[3]

4.2 Valuation Mechanisms

Rule 8 of the Central Excise Valuation Rules (as interpreted in CBIC circulars) deems assessable value to be 110 per cent of cost of production when goods are transferred for captive consumption. However, where the department has resorted to comparable price methodology without testing similarity (e.g., price of neighbouring mills), courts have intervened. The Bombay High Court in Shree Satpuda Tapi Parisar Sahkari Sakhar Karkhana Ltd.[4] held that quality differentials must be established before comparable sales are used to enhance assessable value.

4.3 Remission and Storage Loss

Tribunals have repeatedly recognised the hygroscopic nature of molasses. In Dharmapuri District Coop. Sugar Mills and allied cases[5], remission was allowed where molasses deteriorated within approved storage, harmonising Rule 21 with CBIC Circular 35/88-CX.8.

5. Reservation for Country-Liquor and the “Balance Stock” Formula

5.1 Evolution of the Doctrine

The doctrine that State reservation operates only on balance stock—the residue after captive consumption—originates from Dhampur Sugar Mills Ltd v. State of U.P.[6]. The Court balanced Article 19(1)(g) freedom with the State’s regulatory interest under Article 47, holding that compelling supply out of molasses required for one’s own distillery would be unreasonable.

5.2 Mawana Sugars Litigation

In State of U.P. v. Mawana Sugars Ltd.[7] the Supreme Court revisited the reservation clause for Molasses Year 2015-16. The State argued for a flat 25 % reservation on total production; the mill contended for reservation on balance stock alone. The Court endorsed the latter interpretation, noting that the policy itself assumed captive consumption levels of the previous year and expressly exempted mills with nil balance stock. Importantly, the judgment acknowledged that State policy cannot nullify the earlier constitutional ratio of Dhampur.

5.3 Analytical Observations

  • The “balance stock” formula concretises proportionality: reservation applies only when a mill demonstrably holds surplus.
  • By tying captive consumption to the previous year’s actuals, the policy introduces evidentiary certainty while avoiding post-facto disputes.
  • However, fixation on historical consumption may penalise mills expanding distillery capacity, a lacuna noted in K.M. Sugar Mills Ltd v. State of U.P.[8].

6. Income-Tax Perspective on Captive Consumption

Although arising under the Income-tax Act, Indian Molasses Co. v. Commissioner of Income-tax[9] illuminates the jurisprudential distinction between present and contingent liabilities. The Court refused deduction for sums set aside for future pension, branding them “contingent”. By analogy, excise demands on unverified future production (as in Oudh Sugar Mills) lack the immediacy required for a lawful levy.

7. Environmental and Storage Regulation

The Patna High Court in New Swadeshi Sugar Mills Ltd. v. State of Bihar[1] upheld rules mandating scientific storage of molasses, emphasising its pollution potential (high BOD). Compliance deficits may trigger both environmental penalties and excise complications, because unaccounted leakage is prima facie deemed a “clandestine removal” unless remission protocol is followed.

8. Synthesis and Policy Recommendations

  1. Codification of Valuation Principles: Insert an explicit rule in Central Excise (Valuation) Rules for molasses paralleling Rule 8 but accommodating quality gradation evidence to pre-empt litigation akin to Shree Satpuda.
  2. Dynamic Captive Consumption Benchmark: State policies should allow mid-year revision where bona fide capacity expansion is proved, thereby aligning regulation with industrial growth without compromising country-liquor supply.
  3. Uniform Remission Guidelines: A composite standard, harmonising CBIC circulars and tribunal jurisprudence, must recognise climatic deterioration as inherent loss and prescribe documentary requirements for duty waiver.
  4. Environmental Integration: Storage rules under State Acts should dovetail with the Water (Prevention & Control of Pollution) Act, 1974 to create a single compliance window, reducing transactional costs without diluting safeguards.

9. Conclusion

Indian jurisprudence on molasses captive consumption embodies a delicate equilibrium between fiscal interest, industrial autonomy, and social policy. The Supreme Court has consistently invalidated administrative action resting on conjecture, while simultaneously upholding calibrated reservation schemes tethered to demonstrable surplus. Going forward, legislative clarity and evidence-based administration remain pivotal to minimise friction between sugar mills, distilleries, and the State’s revenue as well as regulatory imperatives.

Footnotes

  1. New Swadeshi Sugar Mills Ltd. v. State of Bihar, 2015 SCC OnLine Pat 1659.
  2. Oudh Sugar Mills Ltd. v. Union of India, 1978 ELT 172 (SC).
  3. UP State Sugar Corporation v. CCE, 2012 (283) ELT 564 (Tri-Del).
  4. Shree Satpuda Tapi Parisar Sahkari Sakhar Karkhana Ltd. v. Union of India, 2014 SCC OnLine Bom 3686.
  5. Dharmapuri District Coop. Sugar Mills Ltd. v. CCE, 2006 (202) ELT 707 (Tri-Chen).
  6. Dhampur Sugar Mills Ltd. v. State of U.P., (2007) 8 SCC 338.
  7. State of U.P. v. Mawana Sugars Ltd., (2018) 11 SCC 216.
  8. K.M. Sugar Mills Ltd. v. State of U.P., 2018 SCC OnLine All 8511.
  9. Indian Molasses Co. (P) Ltd. v. Commissioner of Income-tax, AIR 1959 SC 1049.