Holding

The primary obligation to pay excise duty on IMFL rests with the manufacturer; the duty is part of the manufacturer's turnover for sales tax purposes.

Summary

Mohan Breweries & Distilleries Ltd. and others manufacture Indian Made Foreign Liquor (IMFL) under licences, while the Tamil Nadu State Marketing Corporation (TASMAC) has exclusive wholesale rights. The appellants argued that, under Rule 22 of the Tamil Nadu Indian Made Foreign Spirits (Manufacture) Rules, 1981, the liability to pay excise duty rests with the party removing the liquor from the factory (TASMAC), not the manufacturer, and that such duty should not be included in their turnover for sales tax under Section 2(r) of the Tamil Nadu General Sales Tax Act, 1959. The Supreme Court held that excise duty is a duty on manufacture and the primary obligation to pay it lies with the manufacturer; Rule 22 merely provides a convenient collection mechanism and does not shift liability. Consequently, the excise duty forms part of the manufacturer’s turnover, and Explanation 1‑A of Section 2(r) does not exclude it. The Court also rejected the claim of equitable estoppel. The appeal was dismissed with costs.

Issues considered

The liability to pay excise duty on IMFL – whether it rests on the manufacturer or the party removing the goods (TASMAC).
Whether excise duty paid under Rule 22 forms part of the manufacturer's turnover for purposes of the Tamil Nadu General Sales Tax Act, 1959.
Whether Explanation 1‑A to Section 2(r) of the Sales Tax Act excludes the excise duty from turnover.
The applicability of equitable estoppel against the State in recovering sales tax on the excise duty component.

Legislation cited

Tamil Nadu General Sales Tax Act, 1959s. 2(r), s. Explanation 1-A

Subjects

excise dutyturnoversales taxIndian Made Foreign LiquorRule 22manufacturer liabilityequitable estoppelTamil Nadu

Judgment

MOHAN BREWERIES AND DISTILLERIES'LTD. ETC. ETC. A
v.
COMMERCIAL TAX OFFICER, MADRAS AND ORS.

·SEPTEMBER 9, 1997

[S.P. BHARUCHA, K.T. THOMAS AND V.N. KHARE, JJ.] B

•
Safes Tax

Tamil Nadu General Sales Tax Act 1959ffami/ Nadu Indian Made
Foreign Spir-its (Mamlfacture) Rules, 1981 : Section 2(r)/Rule 22. C
. Manufacturer-Indian Made Foreign liquor-Liability to pay excise
duty-Held, -primary obligation to pay excise duty on the manufacturer-
Rule 22 only provides for convenient method of collection-Excise duty not
physically entering manufacturer's till is not the decisilte test for determining D
whether it would constitute manufacture's turnover.

Tbe appellants manufacture Indian Made Foreign Liquor (lMFL) on the
strength of licenses issued to them under the provisions of t he Tamil Nadu
Indian Made Foreign Spirits (Manufacture) Rules 1981. The Tamil Nadu State
Muketing Corporation Ltd. (TASMAC) had the exclusive privilege of E
supplying by wholesale IMFL for the whole of the Sta te. T he Corporation paid
the excise duty d~redly. The element of the excise duty did not enter into the
turnover of the appellant.

In the writ ,petitions filed in the High Court the .contention ~f the
appellant was that the liability to pay excise duty lay not upon them but upon F
the Tamil Nadu St3te Marketin~ Corporation. The said petition was dismissed.
Hence the present appeals.

In appeal before this Court the contention of the appellant was that
under Rule l l of the Tamil Nadu Indian Made Foreign S pirits (Manufacture)
Rules, 1981, tbe. manufacturer of the IMFL was not liable for payment of G
excise duty but it was upon the party who removed the 1MFL from f!te factory.
It was further submitted that Rule 22 itself was a r epresenbtion ·to tbe
manufacturer and that an equitable estoppel arose against the respondent State
preventing it from receiving sales tax from the manufacturer.
Dismissing the appeal, this Court' H
7
8 SUPREME COURT REPORTS (1997] SUPP. 4 S.C.R.

A HELD : 1.1. The liability to pay excise duty on the IMFL Is that of the
manufacturer thereof. Excise duty is levied upon goods manufactured or
produced. Its incidence falls, therefore, on the manufacturer or producer of
the goods. The collection of excise duty may be deferred to such later stage
as is administratively or otherwise, most convenient (14-B; 13-E]

B Union of India and Ors.• v. Bombay Tyre International Ltd. and Ors.,
119841 J sec 467, relied on.

1.2. Rule 22 of the Tamil Nadu Indian Made Foreign Spirits
(Manufacture) Rules 1981 only provides a mode for collecting the excise duty,
C a mode which is obviously convenient for it requires the party removing the
IMFL from the factory of its production to pay in advance the excise duty
thereon. That party might be the manufacturer. That IMFL should be supplied
in the State by wholesale only through TASMAC cannot be a reason for holding
that the primary obligation to pay excise duty is that ofT ASMAC or that the
manufacturer is absolved of the obligation to pay excise duty. I14-B-D]
D
2. When the excise duty is collected from a party removing the IMFL
from the factory of its production. other than the manufacturer, the payment
of excise duty that party makes is in discharge of the obligation of the
manu facturer. That-party does not, as it would ordinarily do, pay the excise
duty cmnponent along with the sale price of the IMFL It purchases from the
E manufacturer; it pays the sale; price to the manufacture and It pays the excise
duty into the Treasury for and on behalf of the manufacturer. In effect,
therefore, the element of excise duty does enter the turnover of the
manufacturer just as much as it would ordinarily do. (14-H; lS~A-BJ

3. The definition of "turnover" in section 2(r) of the Tamll Nadu General
F Sa les Tax Act, 1959 referring as it does to the aggregate amount for which
goods are sold whether for cash or other valuable consideration is wide
en ou~:h to cover such excise duty. That the excise duty does not physically
enter the manufacturer's till is not the decisive test for determining whether
or not it would be a part oftbe manufacturer's turnover. [15-B-C)
G
Me Dowell and Co. Ltd. v. The Commercial Tax~Officer, [1985) 3 SCR
791 , relied on.

4. The argument based on Explanation (1-A) of section 2(r) of the Tamil
Nadu sales Tax Act cannot be entertained because the amount of excise duty
H was not charged by the appellants by way of tax separately without including
M.S. AND DISTILLERIES LTD. v. COMMERCiAL TAX OFFICER (S.P. BHA~UCHA, J.] 9

the same on the price ·Of the IMFL sold. f15-DJ A
S. Since no .representati!ln had been made by sales tax authority, Rule
22 itself cannot be said to be a representat~on that could have misled the
appellants that an equitable estoppel has arisen preventi!'g the State from
recovering Sales Tax from the manufacturer. 115-D-El
The Central Provinces and Befar Sales of Motor Spirit and Lubricants
-B
Taxation Act, 1938 (1939) ·FeR 18: AIR (1939) FCI and Province of Madras
. v. Boddu Paidanna and Sons, (1942) FCR 90 :AIR (1942) FC 33, . referred
.
. to.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5105 of 1997. C
From the Judgment and Order dated 25.4.89 of the Madras High Court
in W.P. No. 4975 of 1987.
WITH

C.A..No. ~ 106197?5122/97, 5123/97; 5124/97, 5125/97, 5126/9?, 5127-28/ D
97,5129/97,5130/97,5131-5133/97.
. .
G.L. S(lnghi and A.T.M. Sampath for the Appellants.

V.R. Reddy; V. Krishnamurthy and T. Harish Kumar fo~ the Respondents.
The Judgment of the Court was· delivered by . ·, . E
S.P. BHARUCHA, J. These are appeals against the judgments and
orders of Division Benches or" the High Court at Madras in ta~ re~ision cases
that involve the same issue namely, whether the excise duty on potable liquqr
manufactured by the appellants, paid by the purchasers thereof, is includible
in the taxable turnover of the appellants for the p\lrpose of levy of tax under F
the Tamil Nadu General Sales Tax Act.

The appellants manufacture Indian Made .Foreign Liquor (IMFL) on ·the
strength of licences issued to them under the provisions of the Tamil Nadu
lnqian Made Foreign Spirits (Manufacture) Rules, 1.981. The manufacture,
supply.and sale of the JMFL is governed by the Tamil Nadu Prohibition Ac.t, 0
1937 (now referred to as 'the Act'), the Tamil Nadu indian-made Foreign
Spirits (supply by wholesale) Rules, 1981, and the Tamil Nadu Indian Made
Foreign Spirit (Manufacture) Rules, 198 I (now referred to as the ·Wholesale
Rules' and the ·~anufacture Rules' respectively).

By· reason ofSe.ction ·I7-C of the Act, (i~troduced by an amendment in H
lO SUPREME COURT REPORTS [1997) SUPP. 4 S.C.R.

A 1983), the Tamil Nadu State Marketing Corporation Limited, a corporation
wholly owned and controlled by the Government of State ofTamil Nadu, had
at the relevant time the exclusive privilege of supplying by wholesale IMFL
for the whole of that State. Se~tion 18-A provides for excise duty on liquor.
Sub-section {I) thereof reads thus :

B "(l) An excise duty or countervailing duty of such amount as the
State Government may, by notification in the Fort St. George Gazette,
specify from time to time shall, if they so direct, be levied on all liquors
and intoxicating drugs pennitted to be imported , exported, transported,
manufactured, issued from any manufactory or institution or sold,
c under the provisions of this Act or any rule, notification, licence or
pennit issued thereunder."

Section 18-B provides for excise duty on excisable articles. It reads, so far as
is relevant, thus :

" 18-B. Excise duty or countervailing duty on excisable articles-
D Notwithstanding anything contained in section 18-A, with effect on
and from the date of the commencement of the Tamil Nadu Prohibi!ion
(Amendment) Act, 1981, an excise duty or countervailing duty at such
rate not exceeding rupees thirty per proof litre as the state Government
may, from time to time by notification specify, shall be levied [only
E under this Section] on all excisable articles-

XXX XXX XXX

(d) manufactured under any licence granted under this Act;
(e) manufactured at any distillery, blending unit or brewery licensed
F or established under this Act;

(f) issued from a distillery, blending unit, brewery or warehouse
licensed or established under this Act."

Section 18-C, so far as is relevant, reads thus :
G
"18-C. How duty may be imposed. -The excise duty or the
countervailing duty under section 18-B may be levied in one or more
of the following ways :
(a) by duty of excise to be charged in the case of spirits or beer either
H on the quantity produced in, or passed out of a distillery, blending
M. B. AND DISTILLERIES LTD. v. COMMERCIAL TAX OFFICER [S.P. BHARUCHA, J.}}}

unit, brewery or warehouse licensed or established under this Act, or A
in accorda.nce with such scale of equivalents, calculated on the
quantity of materials used or by the degree of attenuation of the wash
or wort, as the case may be, as may be prescribed.''

Rule .22 of the Manufac!ure Rules, a~ amended on 4th October, 1982 reads
ili~ : B
"22. Payment of excise duty and v.end fee.-

(1) an excise duty, at such rate as the State Government may prescribe
from time to time, shall b7 paid by the perso~ who rem'Oves the goods
froin a manufactory, on the stock of Indian-made foreign Spirits so C
removed from the manufactory.
t
(2) A vend fee of rupees two per bulk litre shall be paid by the
licensee on all stocks of Indian-made Foreign Spirits issued from the
manufactory''
D
Ru1e \5 (1) of the wholesale Rules, amended at the same time, reads thus:

"15. Payment of excise duty and vend fee.-(1) The licensee shall·
pay the excise duty on the stock of lndi~n-made Foreign Spirits
removed by him from a mariufactory in the State ~ required under
sub-rule (1) of rule 22 of the Tamil Nadu Indian-made Foreign Spirits E
(Manufacture) Rules, •1981 or the countervailing duty on the stock of
Indian-made Foreign Spiri~s imp.orted .from a manufactory outside the
State or the excise duty or countervailing duty as the case may be,
on the stock of Indian-made Foreign spirits rem<?ved by him from a
bonded warehouse licensed under the Tamil Nadu ~ndian -made Foreign F
Spirits (Storage-in-Bon'd) Rules, 1981. "

These amendments were given retrospective .effect form 23rd May, 1981·.
_,..
\

It was contended ·on behalf of the appellants in ilieir writ petitions
before the High Court that the liability to pay excise dut}t upon the basis of G
the aforesaid provisions lay not upon them but .upon the Tamii ·Nadu State
Marketing corporation- (TASMAC). TASMAC had to submit an application
for its requirement of IMFL and thereupon the excise duty thereon was
assessed. TASMAC pajd the amount the;eof directly. The appellantS neither
collected the excise d~ty from the wholesaler nor had they the stat!Jtory or -
contractual authority to realise the same from it. The appellants were not, H
12 SUPREME COURT REPORTS [1997} SUPP. 4 S.C.R.

A therefore, liable to pay sales tax on excise duty which was neither part of the
sale price· nor consideration for the sale. In. t~e principal judgment, followed
in the other cases, the High court , primarily basing itself upon the decision
of this court in Me Dowells & Company Limited v. The Commercial Tax
Officer, [1985] 3 SCR 791, rejected the contentions on behalf of the appellan~
B and dismissed the writ petitions. Hence these appeals.

It is convenient at this stage to set out certain provisions of the Tamil
Nadu General Sales Tax Act, 1959 (now referred to as "the Sales Tax Act")
Section 2(r) , and Explanation (I-A) thereto, read thus:

C "Section 2(r) "turnover" means the aggregate amount for which goods
are bought or sold, or delivered or supplied or otherwise disposed of
in any of the ways referred to in clause (n) ,by a dealer either directly
or through another, on his own account or on account of others
whether for cash or for deferred payment or other valuable
consideration, provided that the proceeds of sale by a person of
D agricultural or horticultural produce, other than tea, and rubber (na~ral
rubber latex and all varieties and gra~es of raw rubber), grown within
the State by himself or on any land in which he has an interest
whether as owner, usufructuary mortgagee, tenant or otherwise, shall.
be excluded from his turnover;
E XXX XXX XXX

Explanation (1.-A) : Any amount charged by a dealer by way of tax
separately without including the same in the price of the goods
bought or sold shall not be included in the turnover.

F Section 2 (n) defi.nes "sale" to mean "every transfer of the property in goods
(other than by way of a mortgage, hypothecation, charge or pledge) by one
person to another in the course of business for cash, deferred payment or
other valuable consideration ....... " Section 3 provides for the levy of tax on
sales or purchase of goods.
G Learned counsel for the appellants submitted that, by virtue of the
provisions of the Act and the Rules aforementioned, particularly Rule 22 of
the Manufacture Rules, the m·anufacturer of the IMFCwas not liable for the
payment of the excise duty thereon. The imposition of the excise duty by
reason of Rule 22 was squarely on the party who removed the IMFL from its
H manufacturory, namely, TASMAC. The manufacturer could not, by reason of
M 8 AND DISTILLERIES LTD. v. COMMERCIAL TAX OFFICER (S.P BHARUCHA, J.Jl3
. . ~
Rule 22, seek to recover the excise duty from the party so rem~ving the lMFL. A
The element of the excise duty did not enter into the turnover of the
manufacturer and, ~ccordingly, no sales tax was payable on the element of
excise duty. Learned counsel cited the judgment of this Court in Union of
. and others v. Bombay. Tyre International Ltd. and others, Rules, [ 1984]
India
I sec 467' and emphasised t~e reference to the judgments of the Federal B
Court in The Central Provinces and Berar Sales of Motor Spirit and
Lubricants Taxation Act_and Province of Madras v. IJoddu Paidanna and
Sons. In learned counsef's submission, the observations therein supported
the argument that the imposition of excise d!Jty was upon the party who
removed the JMFL from .th.e factory. Learned counsel submitted that the ratio
of the judgment in Me Dowell and Company Limited v. The Commercial T~ C
Officer, [198Sj 3 SCR 791, (the second Me Dowell case), upon which the High
Court had relied, was restricted to the Andhra Pradesh rules therein mentioned
and was inapposite to the provisions which are before us. Learned counsel
sought to draw assistance. from Explanation (I A) to Section 2(r) of the S~es
T~ Act, Learned counsel submitted that Rule 22 itself was a representation
to the manufacturer and even the Sales Tax authorities had been misled by D
it; in their submission, an equitable estoppel arose against the respondent
State which prevented it from recovering sales ta:< from the m~nufacturer on
the element of excise duty. .

Excise duty is levied upon goods _manufactured or produced (Entry 84 E-
of List I and Entry 51 ·of List If of the Seventh Schedule to the Constitution).
Its incidence falls, therefore, on the manufacturer or producer of the goods.
The collection of excise duty may be deferred to such late.r stage as is,
administratively or othe~ise, most convenier~t.

In the case of Central Provinces and Berar Sales of Motor Spirit and F
Lubricants Taxation Act, it was noted that excise duty was a duty ordinarily
levied on the manufacturer or producer in respect of the manufacture ~r
production of the commodity taxed. A distinction was made between the
nature of the tax and the point at which it was collected. It was subject to
the legislative competence of the taxjng authority to impose the duty at the G
stage which was most convenient and the most lucrative, wherever it might
be, but "that is a matter ofthe machinery of cOllection, a~d does not affect
the essential nature of the tax" . This was reiterated by the Federal Court in
Boddu Paidann 's case. In the Bombay Tyre's case, this Court referred to the
aforementioned two authorities of the Federal Court and several authorities
'
of this Court to hold lha.t excise duty was levied on manufacture but it could H

..
14 SUPREME COURT REPORTS [1997] SUPP. 4 S.C.R. .....,.
A be levied at any convenient stage so long as the character of the impost, that
is, that it was a duty on the manufacture or production was not lost. The
method of collection did not affect the essence of the duty but only related
to the machinery of collection for administrative convenience. This Coun
sajd, "While the levy in our country has the status of a constitutional
concept, the point of collection is located where the statute declares it to be''.
B (.

The liability to pay excise duty on the IMFL is, therefore, that of the
manufacturer thereof. Rule 22 only provides a mode for collecting the excise .
j

duty, a mode which is obviously convenient for it requires the party removing
the IMFL from the factory of its production to pay in advance the excise duty
thereon. That party might be the manufacturer. That the Act provides in
c another section that all IMFL should be supplied in the State of Tamil Nadu
by wholesale only through TASMAC dose not, in our view, make any difference
to this position. It cannot be a reason for holding that the primary obligation
to pay excise duty is that ofTAS MAC or that the manufacturer is absolved '.
of the obligation to pay excise duty.
D
We cannot agree with learned counsel for the appellants that the second
Me Dowell cac;e was based only upon the provisions of the Andhra Pradesh
rules that were under consideration. It is amply clear from the citation of the
authorities of this Court in that judgment that it elaborated upon the concept
of excise duty and concluded that " the incidence of excise duty is directly
E relatable to manufacture but its collection can be deferred to a later stage as
a measure of convenience or expediency''. The Andhra Pradesh rules, it was
held, "did not detract from the position that payment of excise duty is the
primary and exclusin obligation of the manufacturer and if payment be made
under a contract or arrangement by any other person it would amount to
meeting of the obligation of the manufacturer and nothing more" . Note was
F taken of the argument that excise duty had never come into the hands of the
appellant and that the appellant had no opportunity to tum it over his hands
and, therefore, the same could not be considered to be a pan of its tumover.
It was held that the argument that "when the excise duty does not go into
~
the common till of the assessee and it dose not become a pan of the circulating
G capital, it does not constitute turnover, is not the decisive test for detennining
whether such duty wouJd constitute turnover" . ";

As we look at it, the primary obligation to pay excise duty on the IMFL
is of the manufacturer thereof. Rule 22 only provides for a convenient method
for its collection. When the excise duty is collected from a party removing the
H IMFL from the factory of its production, other than the manufacturer, the
M.S. AND DISl'ILLERIES LTO. ''· COMMERCIAL TAX OFFICER (S P. OHARUCHA, J.) 15

payment of excise duty that party makes is in di~charge of the obligation of A
the manufacrurer. That party does not, as it would ordinarily do, pay the
excise duty component along with the sale price of the IMFL it purchases to
the manufacturer; it pays the sale price to the manufacturer and it pays the
excise duty into the Treasury for and on behalfofthe manufacturer. In effect,
therefore, the elemen~ of excise duty docs enter into the turnover of the.
manufacturer just as much as it would ordinarily do. The definition of B
"turnover" in Section 2(r) of the Sales Tax Act, referring as it does to " the
aggregate amount for which goods are bought or sold" and "whether for
cash or .... other valuable consideration", is wide enough to cover such excise
duty. That the excise duty does not physically enter the manufacturer's till is,
as held in the second Me Dowell case, not the decisive test for determining · C
whether or not it would be a part of the manufacturer's turnover.

The argument based on Explanation (I -A) of Section 2(r) of the Sales
Tax Act cannot be entertained because the amount of excise duty was not
charged by the appellants by way of tax separately without including the
same in the price of the IMFL sold. D
Insofar as the argument of equitable estoppel is concerned, the short
answer, in our view, is that, admittedly, no representation had been made by
any Sales Tax authorities, and, given the construction. that we have placed
upon it, Rule 22 itself cannot be said to be a representation that could have E
misled the appellants.

In the premesis, the appeals are dismissed, with costs.

S.V.K.t. Appeals dismissed. F