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State Of M.P And Others v. Kct Drinks Ltd. .
Factual and Procedural Background
The respondent company held a D-2 licence authorising it to manufacture Indian-made foreign liquor by blending, reducing and compounding rectified spirit. The Excise Department posted supervisory staff at the respondent’s premises and demanded payment of the full cost of their supervision and establishment. The respondent challenged this levy before the High Court of Madhya Pradesh (MP No. 1456 of 1993). Relying on this Court’s decision in Lilasons Breweries (P) Ltd. v. State of M.P. (1992) 3 SCC 293, the High Court, by judgment dated 4-5-1993, quashed the levy. The State of Madhya Pradesh appealed to the Supreme Court, resulting in the present decision.
Legal Issues Presented
- Whether the levy of the full cost of excise supervisory staff on a licensee holding a D-2 distillery licence is authorised by the Madhya Pradesh Excise Act, 1915 and the conditions of the licence.
- Whether the High Court erred in applying Lilasons Breweries—which struck down Rule 22 of the M.P. Breweries Rules, 1970—to a distillery licence governed instead by the Distillery and Warehouse Rules.
- Whether such recovery constitutes an unauthorised additional excise duty or is merely the price/consideration for granting the State’s privilege to manufacture liquor.
Arguments of the Parties
Appellant (State of Madhya Pradesh)
- The High Court proceeded on the misconception that D-2 licences are issued under Rule 22 of the M.P. Breweries Rules; in fact they are issued under Rules (IV) and (V) of the Distillery and Warehouse Rules.
- Sections 18 and 27 of the M.P. Excise Act, 1915 empower the State to stipulate, and to charge, sums in consideration of granting the privilege of manufacturing liquor; Condition 8 of the licence validly requires payment of the full cost of supervisory staff.
- The demand is supported by Supreme Court precedent—particularly Govt. of A.P. v. Anabeshahi Wine and Distilleries (P) Ltd. (1988) 2 SCC 25—which treats such charges as consideration, not tax.
Respondent
This information was not available in the provided opinion.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Lilasons Breweries (P) Ltd. v. State of M.P. (1992) 3 SCC 293 | Rule 22 of the M.P. Breweries Rules, 1970 permitting additional excise duty demand held ultra vires. | Distinguished; Court held Rule 22 was irrelevant because the respondent’s licence was issued under Distillery & Warehouse Rules, not the Breweries Rules. |
| Govt. of A.P. v. Anabeshahi Wine and Distilleries (P) Ltd. (1988) 2 SCC 25 | Charges for supervisory staff are part of the price for the privilege of manufacturing intoxicants, not a tax or duty. | Relied upon to uphold the impugned levy as valid consideration under the licence conditions. |
| Har Shankar v. Dy. Excise and Taxation Commr. (1975) 1 SCC 737 | Amounts charged to licensees constitute consideration for the State’s exclusive privilege. | Cited (through Anabeshahi) to reinforce that such payments are neither tax nor excise duty. |
| Shri Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd. v. State of Gujarat (1992) 2 SCC 42 | State competence to levy cost of supervision over industrial alcohol as a regulatory measure. | Referenced to show that similar supervisory charges have been upheld. |
| Synthetics and Chemicals Ltd. v. State of U.P. (1990) 1 SCC 109 | States cannot impose excise duty on industrial alcohol but may regulate and levy fees where quid pro quo exists. | Mentioned within Bileshwar to justify the regulatory nature of the impugned levy. |
| Gujchem Distillers India Ltd. v. State of Gujarat (1992) 2 SCC 399 | Followed Bileshwar on validity of supervisory cost recovery. | Referred to as additional support for the State’s power to recover actual supervisory costs. |
Court's Reasoning and Analysis
1. Licensing framework: D-2 licences for distilleries are issued under Rules (IV) and (V) of the Distillery and Warehouse Rules, framed under Sections 18 and 62 of the M.P. Excise Act, 1915. Hence Rule 22 of the Breweries Rules—struck down in Lilasons Breweries—has no application.
2. Statutory power to charge consideration: Section 18 authorises the State to lease the right to manufacture liquor on such conditions as it thinks fit, and Section 27 permits acceptance of sums “instead of or in addition to” duty. Condition 8 of the respondent’s licence expressly obliges payment of the full cost of the excise supervisory staff.
3. Nature of the levy: Relying on Anabeshahi Wine and Har Shankar, the Court held that the amount demanded is consideration for parting with the State’s exclusive privilege and is therefore neither a tax nor an excise duty. The licensee was not compelled to accept the licence; having opted to obtain it, it must honour its conditions.
4. Precedential consistency: The Court noted that analogous supervisory-cost provisions have consistently been upheld in Bileshwar and Gujchem Distillers. These decisions recognise the State’s regulatory power and the legitimacy of recovering actual supervisory expenses.
5. Error of the High Court: The High Court’s reliance on Lilasons Breweries was misplaced because that case dealt with breweries and an ultra vires rule unrelated to distillery licences. Consequently, its conclusion that the levy was unauthorised was unsustainable.
Holding and Implications
Appeal Allowed — High Court judgment set aside.
Direct Effect: The respondent is liable to pay the full cost of the excise supervisory staff as stipulated in its D-2 licence; the quashing of the levy by the High Court stands reversed. No order as to costs.
Broader Implications: The decision reaffirms that charges for supervisory or establishment expenses, when embodied as conditions of a licence granted under the State’s exclusive privilege to manufacture liquor, constitute valid consideration and not an impermissible tax or duty. It does not create new law but consolidates existing precedent on the nature of such levies.
Shah, J.— The respondent Company having a D-2 licence for manufacture of Indian-made foreign liquor from rectified spirit by blending, reducing and compounding Indian-made foreign liquor concentrate, challenged the levy of full costs of supervision and establishment of excise staff posted at its factory premises by filing MP No. 1456 of 1993 in the High Court of Madhya Pradesh at Jabalpur. By judgment and order dated 4-5-1993, the High Court quashed the levy of expenses incurred on supervision and establishment cost on the ground that Rule 22 of the M.P Breweries Rules, 1970 was struck down as ultra vires by this Court in the case of Lilasons Breweries (P) Ltd. v. State of M.P (1992) 3 SCC 293 In Lilasons Breweries (P) Ltd. case (1992) 3 SCC 293 this Court arrived at the conclusion that Rule 22 to the extent it permits raising a demand, which in sum and substance is additional excise duty, without its being actually due, is ultra vires the Act and beyond the rule-making power of the State.
2. Impugned judgment and order passed by the High Court is challenged by filing this appeal.
3. It has been pointed out that the High Court proceeded on a misconception that D-2 licences were issued under Rule 22 of the M.P Breweries Rules, 1970. As a matter of fact, licences were issued under Rules (IV) and (V) of the Distillery and Warehouse Rules. It is pointed out that the Brewery Rules are not applicable to the unit of the respondent as it is not a brewery.
4. In support of the aforesaid contention, learned counsel for the appellants has drawn our attention to the Rules applicable to all distilleries and warehouses in Madhya Pradesh. Relevant Rules (IV) and (V) for the grant of licence are as under:
(IV) The Collector may issue, on payment of a fee of Rs 1000 a licence in Form D-2 for the construction and working of a distillery to any person to whom a wholesale supply licence has been issued.
(V) Subject to sanction of the State Government the Excise Commissioner may issue a licence in Form D-2 for the construction and working of a distillery on payment of a fee of Rs 1000.
5. These Rules are framed by the State Government in exercise of powers conferred under Section 18 read with Sections 62(2)(e), (g) and (h) of the M.P Excise Act, 1915. Section 62(2)(h) empowers the State Government to make rules prescribing the scale of fees or the manner of fixing the fees payable in respect of any licence, permit or pass. Section 18 empowers the State Government to lease to any person the right of manufacturing or of supplying or of selling liquor or intoxicating drug within any specified area, which is as under:
“18. Power to grant lease of right to manufacture, etc.—The State Government may lease to any person, on such conditions and for such period as it may think fit, the right—
(a) of manufacturing, or of supplying by wholesale, or of both, or
(b) of selling by wholesale or by retail, or
(c) of manufacturing or of supplying by wholesale, or of both, and selling by retail,
any liquor or intoxicating drug within any specified area.
2. The licensing authority may grant to a lessee under sub-section (1) a licence in the terms of his lease; and when there is no condition in the lease which prohibits sub-letting, may, on the application of the lessee, grant a licence to any sub-lessee approved by such authority.”
6. Section 27 also empowers the State Government to accept the payment of a sum in consideration of grant of any lease under Section 18, which is as under:
“27. Payment for grant of leases.—(1) Instead of or in addition to any duty leviable under this Chapter, the State Government may accept payment of a sum in consideration of the grant of any lease under Section 18.
(2) Nothing contained in sub-section (1) shall be construed to preclude the State Government from enhancing or reducing the sum received in consideration of a grant of any lease under Section 18 during the course of a financial year or during the currency of a licence and the power to enhance or reduce the sum shall include power to give retrospective effect to such enhancement or reduction from a date not earlier than the commencement of the financial year.”
7. In view of Sections 18 and 27, the State Government is entitled to accept payment of a sum in consideration of grant of any lease in lump sum in addition to any duty leviable under the Act on terms and conditions which are mentioned in the licence deed. Condition 8 of the licence provides that the licensee shall pay the full cost of excise supervisory staff posted at the premises of KCT Drinks, Mandideep, District Raisen.
8. Similar provisions were considered by this Court and their validity is upheld in Govt. of A.P v. Anabeshahi Wine and Distilleries (P) Ltd. (1988) 2 SCC 25 wherein this Court observed thus:( and 31, paras 5-6)
“5. The perusal of the aforesaid provisions of the Act and the Rules leaves no manner of doubt that it was open to the appellant to grant the exclusive privilege of manufacturing and selling wine etc. to the respondent only provided it was, apart from making any other payment, also willing to pay the salaries and allowances referred to in the aforesaid provisions which for the sake of convenience have been described as establishment charges, and which were sought to be recovered as such under the impugned notice of demand. The respondent Company was not under any obligation to take the licence. It was open to it to have refrained from taking any licence under the Act and the Rules if it was not willing to pay the price as required by the Government for the grant of privilege to manufacture and sell intoxicants. The nature of the payment which a licensee such as the respondent is required to make to the State by reason of the State parting with the privilege in regard to manufacture, sale etc. of intoxicants came up for consideration before a Constitution Bench of this Court in Har Shankar v. Dy. Excise and Taxation Commr. (1975) 1 SCC 737, (1975) 3 SCR 254 It was held that the amounts charged to the licensees are neither in the nature of tax nor excise duty, but constituted the price or consideration which the Government charges to the licensees for parting with its privileges and granting them to the licensees.
6. The principles laid down in the aforementioned cases will, in our opinion, apply to the instant case also. The fact of the demand being with regard to establishment charges will make no difference. A predetermined amount equivalent to or even higher than the amount which is sought to be recovered by the appellant from the respondent calculated for the entire period of the licence could have been demanded in a lump sum as price for parting with the privilege and it could not have been challenged by the respondent in view of the principle enunciated by this Court in the aforesaid cases. Simply because the demand was spread over with a view to making it just and reasonable so as to represent the actual expenditure incurred by the Government to maintain the requisite excise staff at the factory premises of the respondent as contemplated by the relevant provisions of the Act and the Rules, it would not become illegal and vulnerable.”
(emphasis supplied)
9. In Shri Bileshwar Khand Udyog Khedut Sahakari Mandali Ltd. v. State of Gujarat (1992) 2 SCC 42 validity of demand under Section 58-A of the Bombay Prohibition Act, 1949 for maintenance of excise staff for supervision of manufacture of industrial alcohol was assailed on the ground of lack of legislative competence of the State. In that case, the Court observed thus:
“4. According to learned counsel since the entire judgment of the High Court proceeded on privilege theory it cannot withstand the principle laid down in Synthetics and Chemicals Ltd. v. State of U.P (1990) 1 SCC 109 Levy as a fee under Entry 8 of List II of Seventh Schedule or excise duty under Entry 51 are different than cost of supervision charged under Section 58-A. The former has to stand the test of a levy being in accordance with law on power derived from one of the constitutional entries. Since Synthetics and Chemicals case (1990) 1 SCC 109 finally brought down the curtain in respect of industrial alcohol by taking it out of the purview of either Entry 8 or 51 of List II of Seventh Schedule the competency of the State to frame any legislation to levy any tax or duty is excluded. But by that a provision enacted by the State for supervision which is squarely covered under Entry 33 of the Concurrent List which deals with production, supply and distribution which includes regulation cannot be assailed. The Bench in Synthetics and Chemicals case (1990) 1 SCC 109 made it clear that even though the power to levy tax or duty on industrial alcohol vested in the Central Government the State was still left with power to lay down regulations to ensure that non-potable alcohol, that is, industrial alcohol, was not diverted and misused as substitute for potable alcohol. This is enough to justify a provision like Section 58-A. In paragraph 88 of the decision it was observed that in respect of industrial alcohol the States were not authorised to impose the impost as they have purported to do in that case but that did not affect any imposition of fee where there were circumstances to establish that there was quid pro quo for the fee nor it will affect any regulatory measure. This completely demolishes the argument on behalf of appellant.”
(emphasis supplied)
10. The aforesaid decision was referred to and relied upon in Gujchem Distillers India Ltd. v. State of Gujarat (1992) 2 SCC 399.
11. In view of the aforesaid settled legal position, the condition empowering the State Government to recover the actual cost of supervisory staff posted at the premises of the respondent cannot be said to be in any way illegal or ultra vires as it constitutes the price or consideration which the Government charges to the licensee for parting with its privilege and granting licence. In this view of the matter, the impugned judgment and order passed by the High Court requires to be set aside.
12. In the result, the appeal is allowed and the impugned judgment and order passed by the High Court is set aside. There shall be no order as to costs.
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