1. The respondent, a public limited company carrying on business in the manufacture of liquor has a brewery in the State of Andhra Pradesh at Hyderabad. It was served with a notice dated 19-12-1984 by the Commissioner of Excise raising a demand for “differential excise duty” on the basis of variation of strength in liquor pursuant to an audit objection raised by the Accountant General. The demand pertained to Excise Years 1978-1979 to 1982-1983. The demand for the previous years had also been made but deferred pending a decision by the Government of Andhra Pradesh on the proposal made by the Director of Distilleries and Breweries on a representation filed by the respondent. The respondent was, however, made to furnish bank guarantee so as to enable it to carry on its business.
2. On 12-1-1990, GOMs No. 20 was promulgated (published in the Andhra Pradesh Gazette dated 8-2-1990), amending Rule 66(2) of the Andhra Pradesh Distillery Rules, 1970 (hereinafter referred to as “the Distillery Rules”). The amendment made to the Rule reads thus:
“6. (2) Liquor shall be bottled at the strength specified by the Commissioner from time to time.
A tolerance of plus minus 0.5 PS is allowed in manufacture of IML with the following conditions:
(a) The tolerance will be purely for the purpose of administering the Acts and Rules and for the convenience of the manufacturers but not for the purpose of calculation of excise duty.
(b) If the strength of IML is observed to be weaker than 25° UP up to 25.5° UP the licensee shall not be eligible for any refund of excise duty.
(c) If the IML is observed to be stronger than 25° UP up to 24.5° UP the differential excise duty shall be payable by the licensee.
(d) Sample of IML from each batch sent to the Chemical Examiner will be passed by the Chemical Examiner if it is within the tolerance limit of 24.5° UP to 25.5° UP. Samples falling beyond the above tolerance limit, will not be passed by the Chemical Examiner.”
3. The respondent filed Writ Petition No. 3359 of 1990 in the High Court of Andhra Pradesh for declaring Rule 66(2) of the Andhra Pradesh Distillery Rules, 1970, as amended by GOMs No. 20, as illegal and arbitrary. It was also the case projected by the respondent that the amendment made on 12-1-1990 could not have retrospective operation and, therefore, the demand made for the differential excise duty for the years 1987-1988, 1988-1989 and for the period from 1977-1978 to 1985-1986 was illegal and unsustainable.
4. The writ petition was resisted and in the counter-affidavit filed by the appellant, it was maintained that the levy of excise duty was linked to the strength of liquor and demand had been made on the basis of “actual verification of the strength”. It was, however, conceded that the GOMs in question, dated 12-1-1990 did not have retrospective effect and that was operative only from 8-2-1990, the date on which it was published.
5. The Division Bench of the High Court, after considering the pleadings and hearing the learned counsel for the parties, allowed the writ petition in the following terms:
“We find that the words ‘but not for the purpose of calculation of excise duty’ in Rule 2(a), as well as sub-rules (b) and (c) are invalid, as inconsistent with the provisions of the Act and we accordingly strike down these provisions. Consequently, levy of excise duty shall be based only on the accepted strength of the liquor produced and not on actual strength within the tolerance limits detected on verification at the time of passing the manufactured goods for issue. A writ will issue as prayed for.”
By special leave, the State is before us.
6. Section 21 of the Andhra Pradesh Excise Act, 1968 is the charging section and provides for levy of excise duty at a rate not exceeding those provided for in the Schedule. Section 21(3) of the Act lays down that excise duty may be levied at different rates according to the strength of the liquor manufactured. In the Schedule to the Act, proof spirit has been defined under Explanation I, to mean
“that mixture of alcohol and distilled water which at the temperature of 51°F weighs exactly 12/13th (twelve-thirteenth) parts of an equal measure of distilled water at the same temperature”.
The Schedule, while prescribing the mode of levy of duty for different excisable articles prescribes the maximum rate of duty and insofar as Indian liquor is concerned, the maximum rate of duty is prescribed on the basis of per litre of the strength of proof spirit.
7. The Andhra Pradesh (Foreign Liquor and Indian Liquor) Rules, 1970 prescribe the strength of liquor in Rule 42, which reads thus:
“42. Strength of Liquor.—No Indian liquor or foreign liquor other than gin, beer, weaker in strength than 25° UP shall be sold under any licence granted under these rules. In the case of gin the strength shall not be less than 35° UP.
Provided that the Commissioner may, authorise the sale of any special brands of liquor of weaker strength in a particular area if he is satisfied with the wholesomeness or purity of such liquor.”
8. It would, thus, be seen that under Rule 42, the licensee is required to maintain the strength which is not weaker than 25° UP both in respect of foreign liquor and Indian liquor other than gin for which the prescribed strength is not less than 35° UP. Every batch of liquor that is manufactured is tested so as to verify whether it conforms the degree of proof, as claimed by the manufacturer. Excise duty is an incidence of manufacture of the excisable article. Rule 77 of the Distillery Rules provides for issue of manufactured liquor only after verification.
9. By virtue of the amendment effected by GOMs No. 20, the tolerance of plus minus 0.5° UP has been allowed in the manufacture of IML (Indian-made liquor) so as to govern any variation during manufacture. The purpose of providing this tolerance of plus minus 0.5° UP apparently is to see that if the manufactured liquor has a strength which varies between 24.5° UP and 25.5° UP, it should be accepted as fit enough for being passed for sale. However, so far as levy of excise duty is concerned, keeping in view the Schedule to the Act and the Rules, which prescribe the strength, it follows that the excise duty is required to be levied—and continues to be levied—on per litre of the strength of proof spirit and that is the unit of assessment of Indian liquor, for the purpose of excise duty. Though a limit of tolerance of plus minus 0.5 PS is allowed in manufacture of IML by the impugned amendment, that does not alter the unit of assessment, which remains as before, so far as the charging provision contained in the Act is concerned.
10. Sub-rule 2(a) which prescribes that the tolerance will be purely for the purpose of administering the Act and the Rules and for the convenience of the manufacturers, however, goes beyond and says that it shall not be “for the purpose of calculation of excise duty”. The Division Bench of the High Court rightly found on this expression in sub-rule 2(a) that it would be a contradiction in terms. Since the Distillery Rules provided for manufacture of liquor on the strength indicated by the Commissioner, it is obvious that a manufacturer is permitted to manufacture liquor at 25° UP except where it is provided otherwise and, therefore, for the purpose of levy of excise duty, it is this proof strength only which can be taken into consideration.
11. The fact that on actual verification, the strength has been found to be 24.5° UP to 25.5° UP, which falls within the permissible limits of tolerance, is irrelevant for the purpose of levy of excise duty. The excise duty is to be levied corresponding to the strength which is prescribed. The High Court, therefore, was justified in holding that sub-rule 2(b) and sub-rule 2(c) introduced by GOMs No. 20, were invalid. These two sub-rules are not only inconsistent with the Act and the Rules but also run counter to the entire scheme of levy of excise duty, as detailed in the Schedule to the Act.
12. Considered thus, we are of the opinion that the impugned judgment and order of the High Court call for no interference. The appeal, therefore, fails and is dismissed but without any order as to costs.