Mohan Meakin Breweries Ltd. vs State of U.P. and Others

G.P. Mathur, J.—This petition under Article 226 of the Constitution of India has been filed for quashing four orders dated 25.3.1981 (Annexure IVA to IVD to the writ petition) passed by the Excise Commissioner, U.P. imposing excise duty and additional excise duty over wastage occurring during manufacture and bottling process of beer.

The Petitioner company owns a Brewery which is situated at Mohan Nagar, Ghaziabad and manufactures beer therein under a licence granted by the Excise Commissioner, U.P. in Form B-I in exercise of power conferred by Section 17(2) of U.P. Excise Act (hereinafter referred to as the Act). The Petitioner has also been granted a licence In Form F.L 3 for in bond bottling of beer, for sale, by the Excise Commissioner in exercise of power conferred by Section 17(1)(d) of the Act. Para 918 of U.P. Excise Manual, Volume I provides for maintenance of registers, some by the Officer-in-charge who is of the rank of an Excise Inspector and some by brewer in a brewery. One such register which is mentioned in para 918 la] (iv) of the U.P. Excise Manual has to be maintained by the Officer-in-charge in Form B-16 is called the Register of Manufacture and Issue of Beer.

The Officer-in-charge, Mohan Nagar. Brewery gave a notice dated 25.9.1973 to the Petitioner to show cause within three days why a penalty of, Rs. 1,45,639.56 be not realised on excess wastage of 55,165.5 B.L. for the quarter ending June, 1973. The notice was accompanied with "Excess Wastage Statement" which showed that wastage of beer was 6,71.862.9 B.L. which was 10.9 per cent of the total production and penalty was levied on the excess part, namely, on 0.9 per cent which amounted to 55.165.5 B.L. The notice was given under Rule 912 of U.P. Excise Manual. The Petitioner gave a reply to the notice on the ground, inter alia, that Rule 912 was being misconceived and misinterpreted and the basis for ascertaining the deficiency in stock of beer in the brewery was wrong. A copy of the reply sent by the Petitioner has been filed as Annexure III to the writ petition. It appears that no decision was taken by the Authority on the reply sent by the Petitioner for a long time and meanwhile Section 28A was inserted with retrospective effect in U.P. Excise Act by U.P. Act No. IX of 1978 which was published on 25.4.1978. Section 28A reads as follows:

28A. Imposition of additional duty in certain cases -- (1) Where the quantity of spirit or beer in a brewery is found, on examination by such officer of the Excise Commissioner in this behalf, to exceed the quantity in hand as shown in the stock account, the brewery shall be liable to pay duty on such excess at the ordinary rates fixed u/s 28.

(2) Where the quantity of spirit or beer is less than that shown in the stock account on such examination and deficiency exceeds ten per cent, (allowance to that extent being made to cover losses due to evaporation, sullage and other contingencies within the brewery, and also to cover loss in bottling and storage) the Excise Commissioner shall levy an additional duty at the rate of one hundred per cent of ordinary rates of duty in respect of such deficit as exceeds ten per cent over and above the ordinary rates of duty.

The Excise Commissioner, however, without issuing any fresh notice passed orders exercising power u/s 28A (2) on 25.3.1981 imposing excise duty and an equal amount of penalty on wastage of 55,165.50 B.L. which exceeded 10 per cent of the deficiency in the quantity of beer found less than that shown in the stock account. Exactly identical four separate orders were passed on the same date for four quarters of the year 1973 and copies of the same have been filed as Annexure IVA to IVD to the writ petition. It is these orders which are impugned in the present writ petition.

The case of the Petitioner is that Respondents have calculated deficiency in the stock of beer in a wrong manner inasmuch as while taking the stock of beer in the brewery, the account of beer as a finished product was not taken but something in the intermediate stage which was still in the process of manufacture was taken into consideration. This has been stated in paragraphs 8, 68 and 69 of the writ petition which are being reproduced below:

That the process of manufacturing beer ends when the sullage and yeast cells are removed by Alteration and fermentation ceases and manufactured bulk beer is ready to be transferred:

(a) for bottling in bond; and

(b) to casks for sale and human consumption as draught beer.

That u/s 28A (2) the permissible wastage has to be considered from the stage after the beer has been manufactured and allowance upto ten per cent for wastage has to be given after that stage.

That neither paragraph 912 of the U.P. Excise Manual, as enforced in the year 1961, nor after its amendment permitted that the quantity of material undergoing process of manufacture or production at various stages to be treated as beer in stock for the purposes of determination of permissible wastage and the impugned assessment orders are vitiated inasmuch as they have been passed by treating various quantities of material undergoing process of manufacture as beer in stock along with finished beer and working of wastage percentage on the said added quantities.

Similar plea has been raised in ground No. XIII of the writ petition.

The stand of the State, however, is that as soon as wort along with yeast is received, the process of manufacture of beer is complete. This has been elaborated in paragraph 6 of the counter-affidavit filed on behalf of the Respondents which reads as follows:

That the contents of paragraph No. 8 of the writ petition are not admitted. It is submitted that wort is passed Into the fermentation vat and fermenting yeast are added to the wort by a simultaneous process. As soon as the wort along with yeast is received in the fermenting vessels or in fermenting vats it ferments and process of manufacture of beer is complete. It is gauged to find out Its quantity and this quantity is entered in the register In Form B-4. In the said register in Form B-4 the dip and gravity of the wort is taken. As fermentation starts simultaneously the quantity determined by dip and gravity is taken to be beer produced. On the register in Form B-4 the breweries representative and the Officer-in-charge of the brewery have to put in their initials. It is denied that the process of manufacture of beer ends when sullage and yeast cells are removed by Alteration. In fact quantity of yeast and sullage filtered out may vary from one Alteration to another in different processes. Even after Alteration beer contains both some yeast and sullage and Petitioner cannot say that he Is only entitled to pay excise duly on such quantity after excluding all such yeast and sullage. The Alteration is only a process to make it more marketable in this competitive business but could not be a part of manufacture. Thus, the anticities and suspensions In beer are itself beer for the purpose.

In paragraph 13 of the counter-affidavit, it is stated that excise duty is Imposed on beer at the stage of manufacture and can be collected, realised or recovered at any stage before it is consumed. In paragraph 29 it is stated that the beer is manufactured as soon as fermenting agencies are added to the wort. (emphasis supplied).

The question which requires consideration Is at what stage the article manufactured by the Petitioner can be held to be ''beer'' which Is exigible to payment of excise duty to the State Government.

Article 246 of the Constitution deals with the distribution of Legislative powers in between the Union and the State Legislatures with reference to the different Lists in the Seventh Schedule. The Parliament has full and exclusive power to Legislate with respect to matters In List I and has also power to Legislate with respect to matters in List III. The State Legislatures, on the other hand, has exclusive power to Legislate with respect to matters in List II minus matters falling In List I and III and has concurrent power with respect to matters included in List III. Entry 51 of List II mentions duties of excise on alcoholic liquors for human consumption. Entry 84 of List I mentions duties of excise on tobacco and on other goods manufactured or produced in India except alcoholic liquors for human consumption. The scope and extent of these two Entries was considered by a Bench of Seven Judges in Synthetics and Chemicals Ltd. and Others Vs. State of U.P. and Others, and the relevant part of para 67 is reproduced below:

67: ....

As mentioned hereinbefore, the relevant entries in the Seventh Schedule to the Constitution demarcate Legislative fields and are closely linked and supplement one another In this connection, reference may be made to Entry 84 of List I which deals with the duties of excise on tobacco and other goods manufactured or produced In India except, inter alia. alcoholic liquors for human consumption. Similarly, Entry 51, List II is the counterpart of Entry 84 of List I so far as the State List is concerned. It authorises the State to impose duties of excise on alcoholic liquors for human consumption and opium, etc. manufactured or produced in the State and the countervailing duties at the same or lower rates on similar goods produced or manufactured elsewhere in India. It is clear that all duties of excise save and except the items specifically excepted in Entry 84 of List I are generally within the taxing power of the Central Legislature. The State Legislature has power, though limited it is, in imposing duties of excise. That power is circumscribed under Entry 51 of List II of the Seventh Schedule to the Constitution....

In State of U.P. and Others Vs. Modi Distillery and Others, , the same view was taken and it was observed as follows in Para 10 of the reports:

What the State seeks to levy excise duty upon in the Group ''B'' cases is the wastage of liquor after distillation, but before dilution; and, in the Group ''D'' cases, the pipeline loss of liquor during the process of manufacture, before dilution. It is clear, therefore, that what the State seeks to levy excise duty upon is not alcoholic liquor for human consumption but the raw material or input still in process of being rendered fit for consumption by human beings. The State is not empowered to levy excise duty on the raw material or input that is in the process of being made into alcoholic liquor for human consumption.

Sub-section (1) of Section 28 of the Act provides that an excise duty at such rate or rates, as the State Government shall direct, may be imposed, either generally or for any specified local area on any excisable article imported or exported or transported or manufactured in any distillery established or brewery licensed u/s 18. Sub-section (3) of same Section lays down the maximum rate of duty for different types of excisable articles and beer is one of them. The expression "excise duty" has been defined in Section 3 (3a) of the Act and it means any such excise duty as is mentioned in Entry 51 of List II in the Seventh Schedule to the Constitution. In view of authoritative pronouncement by Supreme Court, there can be no doubt that the expression "alcoholic liquor for human consumption" used in this Entry means that liquor which as it is consumable, in the sense, capable of being taken by human beings as such, as beverage of drinks and consequently it is at this stage that the State will have the power to levy excise duty and not at any earlier stage.

This very precise question has recently been examined by the Supreme Court in Mohan Meakin Ltd. Vs. Excise and Taxation Commissioner, H.P. and Others, and after considering the ratio of Synthetics and Chemicals and Modi Distillery (supra), it has been held as follows in Para 7 of the reports:

Thus the final product of the beer is relevant excisable article exigible to duty u/s 31 of the Act when it passes through fine filter press and received in the bottling tank. The question is : at what stage the duty is liable to be paid? Section 23 specifically envisages that until the payment of duty is made or bond is executed in that behalf as per the procedure and acceptance by the Financial Commissioner, the finished product, namely, the beer in this case, shall not be removed from the place at which finished product was either in a warehouse within factory premises or precinct or permitted place of usage. Under these circumstances, the point at which excise duty is exigible is the time when the finished product, i.e., beer was received in bottling tank or the finished product is removed from the place of storage or warehouse, etc.

Sri S.C. Budhwar, learned Counsel for the Petitioner has paced before us a copy of the Punjab Excise Act, 1914 which shows the Sections 3 (1), 3 (14), 3 (6) and 3 (6b) of the aforesaid Act which define "beer'', ''liquor'', ''excisable article'', excise duty'' and countervailing duty'' respectively are pari materia with Sections 3 (10), 3 (11), 3 (22a) and 3 (3a) of U.P. Excise Act, 1910 wherein similar definition has been given of these words. The language used in Section 28 of U.P. Act which is the charging section relating to duty on excisable articles is also similar to Section 31 of the Punjab Act. Since the relevant statutory provisions in the U.P. Act are exactly similar to the Punjab Act, the principle laid down in the above-quoted decision will be fully applicable here. Thus, the point at which the liquor manufactured by the Petitioner company is exigible to duty is the stage when the finished product, i.e., beer was received in the bottling tank. The stand of the State as pleaded in paragraphs 8 and 11 of the counter-affidavit that as soon as the wort along with yeast is received in the fermenting vessels or in fermenting vats it ferments and process of manufacture of beer is complete is, therefore, not Justified and cannot be accepted. The Respondents are entitled to calculate the stock of beer for the purpose of Section 28A of the Act at the stage when the same was received in the bottling tank as a finished product and not at any earlier stage. The impugned orders of the Excise Commissioner which are based upon a wrong criteria cannot, therefore, be sustained and have to be set aside.

For the reasons mentioned above, the writ petition succeeds and is hereby allowed. The impugned orders dated 25.3.1981 (Annexures IVA to IVD to the writ petition) passed by the Excise Commissioner are quashed. Respondents are directed to decide the controversy afresh in the light of the observations made above and in accordance with law.