Holding

The State cannot levy a permit fee on rectified spirit as it lacks constitutional competence; the levy is ultra vires.

Summary

Mohan Meakin Ltd., a manufacturer of Indian Made Foreign Liquor, imported malt spirit of over‑proof strength (rectified spirit) into Himachal Pradesh and was levied a permit fee under the State's 1996‑97 excise policy. The company contended that the State lacked legislative competence to impose such a fee because industrial alcohol falls under Union List entry 52, not the State List entries governing intoxicating liquors. The State argued that the fee was a regulatory charge under entries 8, 51 and 66 of the State List. The Supreme Court held that industrial alcohol is not "res extra commercium" and is governed by Article 301, limiting the State's power to levy only compensatory fees under Article 304(b). Since the State had not distinguished between rectified spirit and potable liquor and had not shown a quid‑pro‑quo relationship, the fee was ultra vires. The Court set aside the High Court judgment, allowed the appeal and remitted the matter for fresh consideration.

Issues considered

The State's legislative competence to levy a permit fee on industrial alcohol/rectified spirit.
Whether malt spirit of over‑proof strength is covered by Union List entry 52 or State List entries relating to intoxicating liquors.
Whether the levy constitutes a tax or a permissible regulatory fee under Articles 301 and 304(b) of the Constitution.
Whether the State made the required distinction between potable liquor and industrial alcohol in imposing the fee.

Legislation cited

Constitution of Indias. Article 245, s. Article 246, s. Article 301, s. Article 304(b), s. Schedule VII Entries 42,52,84,8,51,66
Punjab Excise Act, 1914s. 16, s. 18, s. 19, s. 20, s. 21, s. 3(14), s. 3(18), s. 59

Subjects

industrial alcoholrectified spiritpermit feelegislative competenceUnion ListState Listres extra commerciumArticle 301Article 304(b)inter‑state tradeexcise lawconstitutional law

Judgment

[2008] 17 S.C.R. 1195

MOHAN MEAKIN LTD. A
v.
STATE OF H.P. & ORS.
(Civil Appeal No. 7403 of 2008)

DECEMBER 18, 2009
B
[S.B. SINHA AND CYRIAC JOSEPH, JJ.]

Constitution of India, 1950-Article 304 (b); Schedule VII
List I Entries 42 and 52 - Levy of permit fee - By State
Government- On import of 'Malt spirit of over proof strength' c
- Held: Levy of permit fee on rectified spirit not permissible
- State did not have the legislative competence to make law
in respect of imported item as the item falls within legislative
competence of Union legislature under items 42 and 52 of
List I of VII Schedule - State has to make distinction between
'Malt spirit of over proof strength' and 'potable liquor' - D
Doctrine of res extra commercium is not applicable to
industrial alchohol- Punjab Excise Act, 1914 - Import/export
of rectified spirit - Punjab Liquor Permit and Pass Rules,
1932- r. 7.2.
Doctrines/Principles - Doctrine of res extra commercium E
-Applicability of- To industrial alcohol- Constitution of India,
1950 - Article 301. ~
Appellant-company was in the business of
manufacture and sale of India Made Foreign Liquor (IMFL)
and Beer etc. One of its distillery was in the State of F
Himachal Pradesh. Appellant held a licence in Form D-2
in terms of provisions of Punjab Excise Act, 1914. For
running the said distillery, the appellant imported 'Malt
spirit of over proof strength' from its distillery situated in
the State of Uttar Pradesh. G
The State in terms of an excise policy for the year
1996-97 introduced levy of permit fee for transportation
of liquor. Excise and Taxation Officer made demands
towards permit fee on the spirit, imported by the ·
1195 H
L

1196 " SUPREME COURT REPORTS [2008] 17 S.C.R.

A appellant. Representation by the appellant questioning
levy of such fee by the State, was rejected. Writ Petition
challenging the validity of the levy was dismissed by High
Court. ~~

In appeal to this Court, appellant contended that
B State could not have levied the fee, as transportation of
Industrial alcohol and/or rectified spirit was not within
legislative competence of the State; that there ·is
distinction between import of 'potable liquor' and that of
'Malt spirit of over proof strength; that the element _of quid
c pro quo being inherent in the levy of fee and no material
was produced by the State to justify the demand.
Allowing !the appeals, and remitting the matter to High
Court, the Court
HELD:1. No person has any fundamental right to
D carry on business in liquor, it being res extra commercium.
The doctrine of res extra commercium would have no
application to industrial alcohol which is produced in an
industry controlled and regulated in terms of Entry 52, List
I of the Seventh Schedule of the Constitution of India. If
E manufacture and transport of industrial alcohol and/ or
Malt Spirit of over proof strength is not res extra
commercium it is axiomatic that the provisions of Article
301 of the Constitution of India shall apply in relation to
inter-State trade. The State's power to exercise control of
inter-State transport which is within the exclusive
F legislative competence of the Parliament having regard
to Entry 42, List I of the Seventh Schedule of the
Constitution of India would, thus, be limited. Its power to J
impose compensatory tax and/ or fee would also be
limited as envisaged by Article 304{b) of the Constitution
G of India. [Paras 9 and 21] [1201-A; 1209-D-G]
Khoday Distilleries Ltd. and Ors. v. State of Karnataka
and Ors. 1995 (1) sec 574 and State of Punjab and Anr. v.
Devans Modern Breweries Ltd. and Anr. 2004 (11) SCC 26,
distinguished.
H
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1197

'
2. Tbe State has to make distinction between a 'Malt A
Spirit of over proof strength' and 'potable liquor'. Entries
8, 51 and 66 of List II of the Seventh Schedule of the
Constitution of India confer jurisdiction upon the State
only to exercise its legislative control in respect of
matters which are covered thereby. Industrial alcohol or B
spirit having regard to Entry 52 of List I of the Seventh
Schedule of the Constitution of India cannot be subject
··matter of any regulation or control by the State, it being
not alcoholic liquor for human consumption. [Para 20]
(1207-8-C]
c
Synthetics and Chemicals Ltd. and Ors. v. State of U.P.
and Ors. 1990 (1) SCC 109, followed.
3. The State has not made any distinction between
import/export of spirit'and potable alcohol in its demand.
The State furthermore asserts its right to regulate the o
business of liquor including over proof spirit in terms of
the provisions of Punjab Excise Act, 1914 and Punjab
Liquor Permit and Pass Rules, 1932. Even in terms of the
explanation appended to Rule 7.2A of the Rules, the fees
specified in the said Rule would not be payable on
denatured spirit, rectified spirit or perfumed spirit and the E
transport shall not include the transport of Foreign Spirit
or Country Spirit in course of export inter-State or across
the customs frontier of India. The levy, therefore, ex facie
could not have been imposed on rectified spirit. The
jurisdiction of the State to impose such a levy is limited. F
Even while levying a fee, a quantum jump is deprecated.
[Paras 22, 23, 24 and 27] [1209-G; 1212-A-B-C-D; 1215-F]
State of U.P. and Ors. v. Varn Organic Chemicals Ltd.
and Ors. 2004 (1) sec 225, relied on.
Jindal Stainless Ltd. (2) and Anr. v. State of Haryana and G
Ors. 2006 (7) SCC 241; A.P. Paper Mills Ltd. v. Govt. of A.P.
and Anr. 2000 (8) SCC 167; Ashok Lanka and Anr. v. Rishi
Dixit and Ors. 2005 (5) SCC 598; Kera/a Samsthana Chethu
Thozhilali Union v. State of Kera/a and Ors. 2006 (4) SCC
327; State of Kera/a and Ors. v. Maharashtra Distilleries Ltd. H
1198 SUPREME COURT REPORTS [2008] 17 S.C.R.

A and Ors. 2005 (11) SCC 1; Indian Mica Micanite Industries
v. ·The State of Bihar and Ors. 1971 (2) sec 236 and
Commissioner of Income Tax and Anr. v. Distillers Co. Ltd.
2007 (5) sec 353, referred to.
Case Law Reference:
B 1990 (1) sec 109 followed. Para 20
1995 (1) sec 574 distinguished. Para 21
2004 (11) sec 26 distinguished. Para 21
2004 (1) sec 225 Relied on. Para 24
2006 (7)SCC 24 Referred to. Para 25
c
2000 (8) sec 167 Referred to. Para 25
2005 (5) sec 598 Referred to. Para 25
2006 (4) sec 327 Referred to. Para 26
2005 (11) sec 1 Referred to. Para 26
D 1911 (2) sec 236 Referred to. Para 27
2001 (5) sec 353 Referred to. Para 27
CIVIL APPELLATE JURISDICTION : Civil Appeal No.
7403 of 2008. . "
'
From the final Judgment and Order dated 27.6.2007 of the
E High Court of Himachal Pradestt at Shimla in Civil Writ Petition
No. 251 of 1999.
WITH
Civil Appeal No. 7421 of 2008.

F Anoop G. Chaudhary, June Chaudhary, Rakesh Dwivedi,
Prabhat Kumar Rai, K.K. Mohan, Ashish Mohan and Naresh '
K. Sharma for the appearing parties. .J

The Judgment of the Court was delivered by
S.S. SINHA, J.1. Leave gra.nted.
G 2. Constitutional validity of increase in levy made by the
State of Himachal Pradesh inter alia on import/ transport of
rectified spirit and/ or potable alcohol is in question in these
appeals which arise out of a judgment and order dated
27.06.2007 passed by the High Court of Himachal Pradesh,
H Shimla in C.W.P. No. 251 of 1999.
,)
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1199
[S.B. SINHA, J.]

3. Appellant is a public limited company registered and A
incorporated under the Companies Act, 1956. It is carrying on
"'>../ business of manufacture and sale of India Made Foreign Liquor
(IMFL) and beer, etc. Its distillery is situated at Kasauli in the
District of Solan. It holds a licence in Form 0-2 granted by the
State of Himachal Pradesh in terms of the provisions· of the B
Punjab Excise Act, 1914 (for short "the Act") and the Rules
framed thereunder. For the purpose of running the said distillery,
it imported 'Malt Spirit of over proof strength' from its distillery
j situated at Mohan Nagar in the State of Uttar Pradesh. For the
said purpose, it was required to obtain import permit from the
Collector Excise, Himachal Pradesh. It also transported some
c
quantities of Malt Spirit of over proof strength from M/s. Rangar
Breweries Ltd., Mehatpur, Distt. Una as well as from its distillery
situated at Mohan Nagar, Distt. Ghaziabad during the relevant
years, viz., 1997-98 and 1998-99.
D
4. Admittedly, prior to 1.04.1996, no payment was required
to be made for obtaining permit/ transport fee on transportation
of IMFL, country spirit, beer, etc. It was directed to be levied
for the first time in terms of an excise policy for the year 1996
- 97 dated 12.03.1996. A permit fee at the rate of Rs. 2.50
per bulk litres on denatured spirit, Rs. 2.00 per proof litre and E
Rs. 1.00 per proof litre on foreign spirit and country liquor
respectively became leviable. Such permit fee was payable at
the time of grant of permission for transportation of liquor. It was
payable by a person who makes an application for grant of
permission for import and/ or transport of foreign liquor or F
country liquor or both. A demand of Rs. 8,21,992/- was made
• by the Excise and Taxation Officer on or about 28.10.1997
towards permit fee on the spirit imported by the appellant during
the year 1996-97. Another demand for a sum of Rs. 17,68,346/
- was made upto 6.02.1999 for making similar import.
G
Indisputably, no amount towards payment of licence fee was due
from the appellant. It is also not in dispute that export duty at
the rate of Rs. 1.00 per proof litre on Indian Made Foreign Spirit
and at the rate of Rs. 0.50 per bulk litre on beer with alcoholic
content upto 5% and at the rate of Rs. 0. 75 per bulk litre with
alcoholic content exceeding 5% has been paid by the H
1200 SUPREME COURT REPORTS [2008) 17 S.C.R.

A appellant. It has also paid import fee at the rate of Rs. 6/- per
proof litre on spirit imported by it.
5. A representation was made by the appellant in respect
of the said demands by a letter dated 30.01.1999 inter alia
contending that the State of Himachal Pradesh had no
B jurisdiction to levy such fee. In any event, no services having
been rendered to the appellant, quantum jump of the licence
fee in the name of such permit fee was not justified.
The said representation of the appellant was rejected by
an order dated 10.02.1999.
c 6. The High Court, however, by reason of the impugned
judgment rejected the contentions of the appellant.
7. Mr. Anoop G. Chaudfiary_~!!9 Mr. Rakesh Dwivedi,
learned senior counsel appearing on behalf of the appellant,
would submit:
D
(i) Transportatipn of industrial alcohol and/ or rectified
spirit being not within the legislative competence of
the State,
,.d
it cann·ot exercise any control thereover.
(ii) The High Court committed a serious error as it
E · proceeded on the premise that there does not exist
any distinction between import of potable liquor and
that of Malt Spirit of over proof strength.
(iii) The element of quid pro quo being inherent in the
levy of fee and as no material was produced by the
F State to justify its demand, the impugned judgment
cannot be sustained.
8.' Mr. Naresh K. Sharma, learned c.ounsel appearing on .J
behalf of the respondents, on the other hand, would contend that
the State has to incur a huge expenditure towards maintenance
G of staff for regulating the business pf liquor. Permit is granted
for import of country spirit, beer, IMFL, etc. in the interest of the
permit holders themselves so that abuse of import by non-
permit holders can be prevented. Business in both potable
liquor as also Malt Spirit of over proof strength is required to
be regulated by the State for which the State must have a
H machinery.
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1201
[S.B. SINHA, J.]

9. We will assume, as has been contended, that no person A
has any fundamental right to carry on business in liquor, it being
res extra commercium.
10. The question which would, however, arise for
consideration is as to whether the State has the jurisdiction to
impose any restriction on the movement of industrial alcohol B
and/ or Malt Spirit of over proof strength.
11. Part XI of the Constitution of India provides for relations
j
between Union and the States. Chapter I thereof provides for
legislative relations. In terms of Article 245(1) of the
Constitution of India, ordinarily the Parliament has the exclusive c
legislative competence to make laws for the whole or any part
of the territory of India and the Legislature of a State may make
laws for the whole or any part of the State. Article 246 provides
for the subject matter of laws made by the Parliament and by
the Legislatures of States. Indisputably, the Parliament has the D
exclusive power to make laws, in respect of the matters
enumerated in List I of the Seventh Schedule of the Constitution
whereas the State has the exclusive ~'t)islative power to make
laws with respect to any of the matters enumerated in List II of
the Seventh Schedule of the Constitution. We are not concerned
E
herein with the legislative competence of the Union as also the
State as contained in List Ill of the Seventh Schedule of the
Constitution of India. Entry 42 of List I of the Seventh Schedule
of the Constitution provides for inter-State trade and commerce.
Entries 52, 84 and 97 of list I of the Seventh Schedule of the
Constitution read as under: F
•
"52. Industries, the control of which by the Union is declared
by Parliament by law to be expedient in the public interest.
*** *** ***
84. Duties of excise on tobacco and other goods G
;. manufactured or produced in India except-
(a) alcoholic liquors for human consumption.
--(
(b) opium, Indian hemp and other narcotic drugs and
narcotics,
H
;
1202 SUPREME COURT REPORTS [2008] 17 S.C.R.

A but including medicinal and toilet preparations containing
alcohol or any substance included in sub-paragraph (b) of
this entry.
*** *** ***

97. Any other matter not enumerated in List II or List Ill
B
including any tax not mentioned in either of those Lists."
12. Entry 8 of List II of the Seventh Schedule of the
Constitution confers legislative power upon the State in respect
of "Intoxicating liquors, that is to say, the production, -\.
manufacture, possession, transport, purchase and sale of
c intoxicating liquors". Entry 51 of List II thereof provides for an
exception to· the Parliament's power to impose levy of tax on
manufacture of the article, in respect of:
"(a) alcoholic liquors for human consumption;
D (b) opium, Indian hemp_ and other narcotic drugs and
narcotics, but not including medicinal and toilet
preparations containing alcohol or any substance included
in sub~paragraph (b) of this entry." ,,
Entry 66, List II of the Seventh Schedule of the Constitution ""
E reads as under:
"66. Fees in respect of any of the matters in this List, but ,.
not including fees taken in any court."
13. The Act is a pre-constitutional statute.
Section 3(18) of the Act defines spirit and Section 3(14)
F thereof defines liquor. These definitions cover even denatured
spirit. They are broadly worded pre-constitutional definitions.
•
.J
Malt spirit is said to be spirit obtained by distillation of barley ·
or other grain. The strength of Malt Spirit after distillation is said
to be 66% to 70% v/v. It is also with over proof strength. Proof
G liquor is of around 50% v/v. Liquor which is sufficiently below
the same is termed as under proof liquor. :;;.

14. Appellant herein contends that it had imported Malt
Spirit of over proof strength and the application for grant of "1-
permit vis-a-vis levy of fee pertained only thereto. It has
H furthermore been contended that the Malt Spirit imported by it
"
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1203
[S.B. SINHA, J.]

being rectified spirit, it is not potable as per ISi Specifications. A
It is not bought and sold in the market as potable liquor. It is
used as a raw material for blending to manufacture IMFL.
Contention of the appellant, therefore, is that it is not an
excisable article within the meaning of the provisions of Section
3(6) of the Act. B
Section 16 of the Act restricts import, export and
transportation of intoxicants, except upon payment of any duty
or execution of a bond or compliance with such conditions as
j
the State Government may impose. Section 18 provides for
issuance of passes for import, export and transport to be c
granted in terms of Section 19 thereof. Sub-section (2) of
Section 20 forbids construction or working of any distillery or
brewery, save and except under the authority and subject to the
terms and conditions of the licence granted in that behalf by
the Financial Commissioner under Section 21 of the Act, which
0
reads as under:
"21. The Financial Commissioner, subject to such
restrictions or conditions as the State Government may
impose, may -
(a) establish a distillery in which spirit may be E
manufactured under a license granted under section 20;
*** ***
(d) make rules regarding -
*** *** ***
F
(11) any other matters connected with the working of
distilleries or breweries."
The rule making power is conferred upon the Financial
Commissioner by reason of Section 59 of the Act, which reads
as under:
G
"59. The Financial Commissioner may, by notification,
make rules -
(a) ***
(b) ***
H
1204 SUPREME COURT REPORTS [2008] 17 S.C.R.

A (c) ***
(d) prescribing the scale of fees or the manner of fixing the ..\-
fees payable in respect of any license, permit or pass or
in respect of the storing of any intoxicant; .
(e) regulating the time, place and manner of payment of
B any duty or fee;
(f) prescribing the authority by; the restrictions under and
the conditions on which, any license, permit or pass may
be granted - " -l

c 15. Pursuant to or in furtherance of the said power, the
Financial Commissioner made rules known as the Punjab
Liquor Permit and Pass Rules, 1932 (for short "the Rules). The
Rules are applicable subject to such modifications as has been
' made in the State of Himachal Pradesh, the relevant provisions
'whereof are as under:
D
"7.2. Subject to the provisions of order 23 of the Himachal
Pradesh Liquor Import, Export, Transport and Possession
Orders, 1965, a person importing, exporting or transporting- ·~

foreign liquor, country spirit, rectified spirit or denatured
spirit must obtain -
E .,
(a) a permit ·in form L-32 in the case of import and
transport or corresponding permit in case of export from
the officer authorized to grant such permits in the district,
State or Union territory of destination; and
F (b) a pass in form L-34 for export and transport and a
corresponding pass for import from the officer authorized
to grant such passes in the place of issue;
_J
-
Provided that a pass for the removal of spirit and
beer from a licensed distillery or brewery or a warehouse
G issued in accordance with the rules made by the Financial
Commissioner, shall be deemed to be a pass for the
purpose of this rule;
Provided further that a permit shall not be required i-
for the transport or foreign liquor, country spirit, rectified
H spirit or denatured spirit within a district, except when
~
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1205
[S.B. SINHA, J.]

denatured spirit is transported from the bonded warehouse A
of a licensed distillery;
-I
Provided further that the members of the diplomatic
staff of a foreign embassy located in the State of H.P. shall
not be required to obtain a permit for import and transport
of imported liquor. B
7.2A. A fee at the rate of (a) Rs. 2.00 per proof litre of
foreign liquor (excluding beer, secremental wine, wine and
cider) and (b) Re. 1.00 per proof litre of country spirit shall
) be payable by a person who makes an application for the
grant of permission to import and/ or transport of the c
foreign liquor; (excluding beer secremental wine, wine and
cider) or country liquor or both:
Provided that in the case of events covered by the second
proviso to clause (b) of rule 2, the fee shall also be payable
at these rates by a licensee who makes an application for D
the grant of permission to transport foreign liquor
(excluding beer, secremental wine and cider) or country
spirit or both:
> Provided further no fee shall be payable on the
quantity of Foreign liquor (excluding beer secremental E
,- wine, wine and cider) on which such fee has already been
paid and recovered previously in Himachal Pradesh.
Explanation -1. In this rule, the expression "transport" shall
not include the transport of Foreign Spirit or country spirit
in course of 'export' inter - State or across the customs F
frontier of India.
-- 2. The fee specified in this rule shall not be payable on
denatured spirit rectified spirit or perfumed spirit."
By reason of notifications dated 1.04.1997 and
1.04.1998, the rates of fees mentioned in Rule 7.2-A were G
modified.
16. Rule 7.9 of the Rules reads as under:
~ "7.9. All passes granted to cover the import of country
spirit and foreign liquor, shall be subject to the condition H
1206 SUPREME COURT REPORTS [2008] 17 S.C.R.

A that no consignment shall be brought into use until it has
been examined by the excise inspector or sub-inspector
of the district of destination, to whom intimation of the
arrival of the consignment shall be given; such examination
shall be conducted within seven days of the receipt of the
B intimation which shall be dispatched by the importer on the
day following the receipt of the consignment."
17. The Financial Commissioner also made the Excise
Barriers' Rules, 1939; Rules 19.1 and 19.2 thereof read as
under:
C "19.1. The Financial Commissioner may establish excise
outposts at such places as he may think fit on any road.
or at any ferry, for the prevention of the smuggling of
excisable articles or opium, and may depute Excise
Inspectors to be in charge of such outposts.
D 19.2. The driver of any vehicle or laden animal arriving at
an excise post shall stop his vehicle or animal or arrival at
the outpost until the excise officer has conducted his
search. The excise officer will proceed with the search
forthwith."
E 18. Indisputably, the -State has the exclusive authority to
grant licence. Our attention has been drawn to one of the
conditions of the licence granted in favour of the appellant in
Form 0-2 which reads as under:
"1. The licensee shall observe the provisions of the Punjab
F Excise Act, 1 of 1914 and all rules made thereunder and
all rules made under any other law for the time being in
force applicable to the manufacture, issue and sale· of
spirit."
19. Indisputably, the appellant being a licensee must abide
G by the terms and conditions of licence. It is also bound to follow
the rules framed in this behalf. A subordinate legislation which.
however, is beyond the legislative competence of the State
would be ultra vires. Furthermore, there cannot be any doubt
that the State possesses the right to have complete control over
H all aspects of intoxicarits, viz., manufacture, collection, sale and
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1207
[S.B. SINHA, J.]

consumption, etc. It also has the exclusive right to manufacture A
and sell liquor and to transfer the said right with a view to raise
revenue. Right to fix the amount of consideration for grant of
said privilege for manufacturing or vending liquor is also beyond
any doubt or dispute.
20. The State has to make distinction between a Malt B
Spirit of over proof strength and potable liquor. Entries 8, 51
and 66 of List II of the Seventh Schedule of the Constitution of
India confer jurisdiction upon the State only to exercise its
) legislative control in respect of matters which are covered
thereby. Industrial alcohol or spirit having regard to Entry 52 ofc
List I of the Seventh Schedule of the Constitution of India cannot

- be subject matter of any regulation or control by the State; it
being not alcoholic liquor for human consumption.
The question is well-settled in view of the decision of a
Seven-Judge Bench of this Court in Synthetics and Chemicals D
Ltd. and Others v. State of UP. and Others [(1990) 1SCC109]
wherein it was categorically held:
"53. It was further submitted by the State that the
~
State has exclusive right to deal in liquor. This power
according to the counsel for the State, is reserved by and/ E
or derived under Articles 19(6) and 19(6)(ii) of the
c
Constitution. For parting with that right a charge is levied.
It was emphasised that in a series of decisions some of
which have been referred to hereinbefore, it has been ruled
that the charge is neither a fee nor a tax and termed it as
F
privilege. The levy is on the manufacture. possession of
...
alcohol. The rate of levy differs on its use, according to the
).
State of U.P. The impost is also stipulated under the trading
powers of the State under Article 298 and it was contended
that the petitioners and/or appellants were bound by the
terms of their licence. It was submitted that the Parliament G
-< has no power to legislate on industrial alcohol, since
industrial alcohol was also alcoholic liquor for human
consumption. Entry 84 in List I expressly excludes alcoholic
~
liquor for human consumption; and due to express
exclusion of alcoholic liquor for human consumption from H
1208 SUPREME COURT REPORTS [2008] 17·S.C.R.

A List I, the ,residuary Entry 97 in List I will not operate as
against its own legislative interest. These submissions
have been made on the assumption that industrial liquor )--
or ethyl,alcohol is for human consumption. It is important ' ~

to emphasise that the expression of a constitution must be
B understood in its common and normal sense. Industrial
alcohol as .it is, is incapable of being consumed by a
normal human being. The expression 'consumption' must
also .be understood in the sense of direct physical intake
by human.beings in this context. It is true that utilisation in _(
some. form or the other is consumption for the benefit of
c
human beings if industrial alcohol is utilised for production
of rubber, .tyres used. The utilisation of those tyres in the
vehicle of man cannot in the context in which the
expression has been used in the Constitution, be
understood to mean that the alcohol has been for human
D consumption.
54. We have no doubt that the framers of the
Constitution when they used the expression 'alcoholic L
liquor for human consumpt!.pn' they meant at that time and ~
still the expression means that liquor which as it is is
E consumable in the sense capable of being taken by
human beings as such as beverage of drinks. Hence, the
expression under Entry 84, List I must be understood in
that light. We were taken through various dictionary and
other meanings and also invited to the process of
F manufacture.of alcohol in order to induce us to accept the
position that denatured spirit can also be by appropriate tr}-

cultivation or application or admixture with water or with -'
others, be transformed into 'alcoholic liquor for human
consumption' and as such transformation would not entail
G any process of manufacture as such. There will not be any
organic or fundamental change in this transformation, we
were told. We are, however, unable to enter into this .
'
examinatiOn,-Constitutional provisions specially dealing
with the delimitation of powers in a federal polity must be ~
understood in a broad commonsense point of view as
H
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1209
[S.B. SINHA, J.]

understood by common people for whom.tbe..Co.nstitution A
is made. In terminology, as understood by the framers of
the Constitution, and also as viewed at the relevant time
of its interpretation, it is not possible to proceed otherwise;
alcoholic or intoxicating liquors must be understood as
these are, not what these are. capable of or able to B
become. It is also not possible to accept the submission
that vend fee in U.P. is a pre-Constitution imposition and
would not be subject to Article 245 of the Constitution. The
) present extent of imposition of vend fee is not a pre-
Constitution imposition, as we noticed from the change of
c
rate from time to time."
21. The doctrine of res extra commercium as applied by
this Court. in respect of potable alcohol in its various judgments
including Khoday Distilleries Ltd. and Others v. State of
Karnataka and Others [(1995) 1 SCC 574] and State of Punjab
D
and Another v. Devans Modern Breweries Ltd. and Another
[(2004) 11 sec 26] would have no application to industrial
alcohol which is produced in an industry controlled and
regulated in terms of Entry 52, List I of the Seventh Schedule
of the Constitution of India. If manufacture and transport of
t.
\
industrial alcohol and/ or Malt Spirit of over proof strength is E
not res extra commercium in view of the binding decisions of
this Court in Synthetics and Chemicals Ltd. (supra), it is
axiomatic that the provisions of Article 301 of the Constitution
of lndi.a shall apply in relation to inter-State trade. The State's
power to exercise control of inter-State transport which is within F
the exclusive legislative competence of the Parliament having
)_ regard to Entry 42, List I of the Seventh Schedule of the
Constitution of India would, thus, be limited. Its power to impose
compensatory tax and/ or fee would also be limited as
envisaged by Article 304(b) of the Constitution of India.
G
22. The State has not made any distinction between
import/ export of spirit and potable alcohol.

~
By its letter dated 28 .1 O.1997, it was stated:
"Whereas you have imported/ transported 4,46,880.00
H
1210 SUPREME COURT REPORTS [2008] 17 S.C.R.

A PLs of spirit from· R.B.L. Mehatpur and Mohan Meakin
Limited, Mohan Nagar (UP) to Ka~auli Distillery for the year
1996-97 upon which permit fee @ Rs. 2/- per P.L. was y
leviable. Out of the quantity mentioned above 35,884,350
PLs of IMFS was (sic) and you have paid the permit fee
B @Rs. 2/- per PL for the said quantity."
[Emphasis supplied] (__

The said demand was reiterated by the--State in terms of
~
its letter dated 27.01.1999.
-4.
In its representation dated 30.01.1999, the appellant
c averred:
"3. Under entry 51 of List II of Seventh Schedule to
Constitution of India, State is empowered to levy and
charge Excise Duty on "Alcoholic Liquors for human
consumption" and similarly under item No. 66 the State is >
D
empowered to levy and charge fees in respect of matters
in this list i.e. on Alcoholic liquors for human consumption.
Bulk spirit on which Permit/ Transport Fee is sought to be
charged is of over proof strength and is not an Alcoholic ,.,.
...J.

Liquor for human consumption. Thus, State is not
E empowered to levy/ charge permit/ transport fee on
transport of spirit of over proof strength. Levy of any duty
or fee on spirit of over proof strength is wit.Qin the
competence of Government of India as mentioned in entry
84 and 96 of List I to Seventh· Schedule to the Constitution
F of India. In view of this position the demand is illegal and
against the provision of Constitution of India.'~
Appellant, in its representation dat~;~AJ2.1999, stated:
• • :=::."""'"~...

"The permit fee is being demanded on the import/ transport
"
of spirit of over proof strength which is of alcoholic liquor
G for human consumption and does not fall within the ambit
of entry 51 of List II 6f Vllth Schedule to Constitution of India
read with item 66 ibid. The State is empowered to levy
permit fee on transport of Alcoholic Liquor for human
i-
consumption only. Levy of duty or fee ori spirit of over proof
H strength is within the competence of Union of India/
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1211
[S.B. SINHA, J.]

Parliament of India as mentioned in entry 84 and 96 of List A
I to VI Ith Schedule to Constitution of India."
23. We may, on the other hand, notice the contentions of
the State, in its counter affidavit before the High Court:
"Accordingly, grant and issue of permit is essentially
regulatory in character. Viewed in this perspective, the B
permit fee is not under Entry 51, and has no linage
whatsoever with the duties of excise or countervailing
_) duties on alcoholic liquors meant for human consumption.
It is, thus, not only patently incorrect but also wrong to draw
a nexus between Entry 51 and the permit fee. The object c
of permit is to regulate transport, (which includes import
as well) under Entry 8 of the said List II of the Seventh
Schedule to the Constitution. Therefore, the proper linkage,
for the purposes of permit fee, is between Entry 8 and
Entry 66 of List II of the Seventh Schedule." D
It was furthermore stated:
"It is, therefore, submitted that the malt spirit whether in
over proof strength or in under proof strength, is meant for
potable purposes and in both the cases it does not lose
the basic character of intoxicating liquors and the State E
Government under Entry No. 8 and 51 read with Entry 66
of List II of Seventh Schedule to the Constitution of India
is competent to legislate and to levy the duties/ fees.
Contentions of the petitioner to the contrary are denied."
The contention of the State as would appear from its F
counter-affidavit filed before us is as under:
:•
"... It is further submitted that the fee in question is neither
a tax nor duty so as to attract the provisions of Entry 42 of
List - I of Seventh Schedule to the Constitution of India.
Permit fees, it is reiterated is not levied on the import of G
liquor rather it is charged on every permit to import/
transport the liquors whether inter - state or intra-state for
the services. Therefore, the Hon'ble High Court is justified
to hold that the State Government is empowered to make
rules authorizing it to levy permit fee." H
1212 SUPREME COURT REPORTS (2008) 17 S.C.R.

A The State furthermore asserts its right to regulate the
business of liquor including over proof spirit in terms of the
provisions of the Act and the Rules framed thereunder. ~

24. We have noticed hereinbefore that even in terms of the
explanation appended to Rule 7.2A of the Rules, the fees
B specified in the said Rule would not be payable on denatured
spirit, rectified spirit or perfumed spirit and the transport shall
not include the transport of Foreign Spirit or Country Spirit in
course of export inter-State or across the customs frontier of
India. t

c The levy, therefore, ex facie could not have been imposed
on rectified spirit.
The jurisdiction of the State to impose such a levy is
limited. It has been so held in State of UP. and'Others v. Vam
Organic Chemicals Ltd. and Others [(2004) 1 SCC 225] in the
D following terms:
"29. The State's power is thus limited to (i) the regulation
of non-potable alcohol for the limited purpose of preventing
its use as alcohol.ic liquor, and (ii) the charging of fees ':4
based on quid pro quo."
E It was furthermore held:
"43. Considering the various authorities cited, we are of
the view that the State Government is competent to levy
fee for the purpose of ensuring that industrial alcohol is not
surreptitiously converted into potable alcohol so that the
F State is deprived of revenue on the sale of such potable
alcohol and the public is protected from consuming such )<,
'
illicit liquor. But this power stops with the denaturation of
the industrial alcohol. Denatured spirit has been held in
Varn Organics-I to be outside the seisin of the State
G Legislature. Assuming that denatured spirit may by
whatever process be renatured (a proposition which is
seriously disputed by the respondents) and then converted
into potable liquor, this would not give the State the power -}-
to regulate it. Even according to the demarcation of the
H fields of legislative competence as envisaged in Bihar
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1213
[S.B. SINHA, J.]

Distillery industrial alcohol for industrial purposes falls within A
the exclusive control of the Union and according to Bihar
Distillery "denatured rectified spirit, of course, is wholly and
exclusively industrial alcohol" (SCC p. 742. para 23)."
As regards imposition of fee, it was opined:
8
"44. Besides, the fee is required to be justified with
reference to the cost of such regulation. The industry is
already paying a fee under Rule 2 for such regulation.
Indeed, the justification for levying the fee under Rule 3(a)
is the identical justification given by the State for levying
the fee under Rule 2. Presumably, a full complement of C
excise officers and staff are appointed by the State in the
Excise Department to carry out their duties under the Act
to oversee, control and keep duty on the various kinds of
intoxicants under the Act. Having regard to the decision
in Varn Organics-I we must also assume that apart from D ,
the normal strength, additional officers and staff were
appointed to regulate the denaturation of the industrial
alcohol. There is nothing to show that there has been any
deployment of any additional staff to oversee the possibility
of renaturation of the denatured spirit."
E
25. The question as regards 'aspects of power to levy fee
vis-a-vis tax' came up for consideration before this Court in
Jindal Stainless Ltd. (2) and Another v. State of Haryana and
Others [(2006) 7 SCC 241] wherein this Court held:
"38. In the generic sense, tax, toll, subsidies, etc. are F
manifestations of the exercise of the taxing power. The
primary purpose of a taxing statute is the collection of
revenue. On the other hand, regulation extends to
administrative acts which produces regulative effects on
trade and commerce. The difficulty arises because taxation G
is also used as a measure of regulation. There is a
working test to decide whether the law impugned is the
result of the exercise of regulatory power or whether it is
the product of the exercise of the taxing power. If the
impugned law seeks to control the conditions under which
an activity like trade is to take place then such law is H
1214 SUPREME COURT REPORTS [2008) 17 S.C.R.

A regulptory. Payment for regulation is different from payment
for revenue. If the impugned taxing or non-taxing .law
chooses an activity, say, movement of trade and .i,.-
commerce as the criterion of its operation and if the effect
of the operation of such a law is to impede the activity, then
B the law is a restriction under Article 301. However, if the
law enacted is to enforce discipline or conduct under which
the trade has to perform or if the payment is for regulation
of conditions or incidents of trade or manufacture then the
levy is regulatory. This is the way of reconciling the concept.
of compensatory tax with the scheme of Articles 301, 302
c and 304. For example, for installation of pipeline carrying
gas from Gujaratto Rajasthan, which passes through M.P.,
a·fee charged to provide security to the pipeline will come
in the category of manifestation of regulatory power.
.'
,;

However, a tax levied on sale or. purchase of gas which
D flows from,that very pipe is a manifestation of exercise of
the ta'xing power. This example indicates the difference
between taxing and regulatory powers (see Essays in
Taxation by Seligman).
Difference between "a tax", "a fee" and "a Compensatory
E Tax''
Parameters of Compensatory Tax
39. As stated above, in order to lay down the parameters
of a compensatory tax, we must know the· concept of
taxing power."
F
It was observed:
>{
"43.' In the context of Article 301, therefore, compensatory
tax is a compulsory contribution levied broadly in
proportion to the special benefits derived to defray the
G costs of regulation or to meet the outlay incurred for some
special advantage to trade, commerce and intercourse. It
may incidentally bring in net revenue to the Government but
that circumstance is not an essential ingredient of
compensatory tax." -\-

H This Court furthermore opined that the burden of proof in
MOHAN MEAKIN LTD. v. STATE OF H.P. & ORS. 1215
[S.B. SINHA, J.]

this behalf would be on the State, stating: A
"46 ... As soon as it is shown that the Act invades freedom
of trade it is necessary to enquire whether the State has
proved that the restrictions imposed by it by way of taxation
are reasonable and in public interest within the meaning
of Article 304(b) [see para 35 (of AIR) of the decision in B
Khyerbari Tea Co. Ltd. v. State of Assam]."/
Furthermore, it was held in A.P. Paper Mills Ltd. v. Govt.
of A.P. and Another ((2000) 8 sec 167] that even if a fee is
levied for issuance of permit, it was only for the purpose of
recovering the administrative charges. [See also Ashok Lanka c
and Another v. Rishi Dixit and Others (2005) 5 SCC 598]
26. This Court in Kera/a Samsthana Chethu Thozhilali
Union v. State of Kera/a and Others ((2006) 4 stC 327], upon
noticing State of Kerala and Others v. Maharashtra Distilleries
Ltd. and Others [(2005) 11 SCC 1], opined: D
"39. In State of Kera/av. Maharashtra Distilleries Ltd. this
~ Court took notice of the provisions of Section 18-A of the
Act. It was held that the State had no jurisdiction to realise
the turnover tax from the manufacturers in the garb of
exercising its monopoly power. It was held that turnover tax E
cannot be directed to be paid either by way of excise duty
or as a price of privilege."
27. Even while levying a fee, a quantum jump is
deprecated.
In Indian Mica Micanite Industries v. The State of Bihar F
and Others [(1971) 2 SCC 236], it has been held:
"17 ... There cannot be a double levy in that regard. In the
opinion of the High Court the subsequent transfer of
denatured spirit and possession of the same in the hands
of various persons such as wholesale dealer, retail dealer G
or other manufacturers also requires close and effective
supervision because of the risk of the denatured spirit
.J
being converted into palatable liquor and thus evading
heavy duty. Assuming this conclusion to be correct, by
doing so, the State is rendering no service to the H
1216 SUPREME COURT REPORTS [2008) 17 S.C.R.

A consumer. It is mer~ly protecting its own rights. Further in
this case, the State which was in a position to place
material before the Court to show what services had been
rendered by it to the appellant and other similar licensees,
the costs or at any rate the probable costs that can be said
B to have been incurred for rendering those services and the
amount realised as fees has failed to do so. On the side
of the appellant, it is alleged that the State is collecting
huge amount as fees and that it is rendering little or no
service in return. The co-relationship between the services
rendered and the fee levied is essentially a question of
c fact. Prima facie, the levy appears to be excessive even
if the State can be'"said to be rendering some service to
the licensees. The State ought to be in possession of the
material from which the co-relationship between the levy
and the services rendered can be established at least in
D a general way. But the State has not chosen to place those
materials before the Court. Therefore the levy under the
impugned Rule cannot be justified."
In this case, the State in fact has not produced any material
whatsoever before the High Court.
E
In Commissioner of Income Tax and Another v. Distillers
Co. Ltd. ((2007) 5 SCC 353], this Court held that even for the
purpose of levy of exci~e duty, the same must have a direct
relationship with the manufacture of arrack.
F 28. We, therefore, are of the opinion that the impugned
judgment cannot be sustained. It is set aside accordingly and
the matter is remitted to the High Court for consideration of the
Writ Petition filed by the appellant afresh. The parties shall be
at liberty to file additional affidavits/ evidence before the High
Court, if they so desire:
G The appeals are aHqwed. Respondents shall bear the cost
of the appellant. Couns~'s fee assessed at Rs. 50,000/-.
K.K.T. Appeals allowed.