Holding

The duty under Section 17 is a privilege price, not a duty of excise, and from 5 January 1999 onward the duty paid by KSBC forms part of the consideration and must be included in the manufacturers' turnover for turnover tax.

Summary

The State of Kerala created a monopoly in the wholesale trade of Indian Made Foreign Liquor (IMFL) by establishing the Kerala State Beverages Corporation (KSBC) as the sole purchaser of liquor from manufacturers. The dispute centered on whether the duty levied under Section 17 of the Kerala Abkari Act was a true excise duty and whether the liability to pay it fell on the manufacturers or on KSBC, and consequently whether the duty should be included in the manufacturers' turnover for turnover tax under the Kerala General Sales Tax Act. The Supreme Court held that the duty under Section 17 is not a duty of excise but a privilege price payable by KSBC, and that only from 5 January 1999, when KSBC began paying the duty to manufacturers, the duty formed part of the consideration and must be included in the manufacturers' turnover. Accordingly, the manufacturers became liable to pay turnover tax on the duty amount from that date. The Court also affirmed the constitutional validity of the amendment to Section 5(2C) of the Sales Tax Act, rejecting the claim that it was void. The appeals were partly allowed for the first batch and dismissed for the remaining appeals.

Issues considered

Whether the levy of duty under Section 17 of the Kerala Abkari Act constitutes an excise duty.
Whether the liability to pay the duty falls on the manufacturer/distiller or on KSBC.
Whether the amount of duty paid by KSBC should be included in the manufacturers' turnover for turnover tax under the Kerala General Sales Tax Act.
Constitutionality and retrospective effect of the amendment to Section 5(2C) of the Kerala General Sales Tax Act.

Legislation cited

Kerala Abkari Acts. 12, s. 14, s. 17, s. 18, s. 1SA
Kerala General Sales Tax Act, 1963s. 2(xxvii), s. 5(1), s. 5(2C)

Subjects

excise dutyturnover taxprivilege priceKerala Abkari Actmonopolybonded warehousetax incidenceconstitutional validitysales taxliquor

Judgment

STATE OF KERALA AND ORS.
v.
MAHARASHTRA DISTILLERIES LTD. AND ORS

MAY 6, 2005

[N. SANTOSH HEGDE, S.N. V ARIA VA, B.P. SINGH, H.K. SEMA B
AND S.B. SINHA, JJ.]

Excise Laws:

Kera/a Abkari Act-Section 17(a) to (g)-Kerala General Sales Tax
c
Act, 1963-Sections 2(xxvii), 5(2C)-Foreign Liquor Rules, 1953-Rule 13(9)-
Kerala Abkari Shops (Disposal in Auction) Rules, 1974-Foreign Liquor
(Storage in Bond) Rules, 1961-Kerala Distillery and Warehouse Rules, 1968:

Monopoly created by Government of Kera/a in wholesale trade oflMFL D
in favour of Government Company KSBC-Jn view of monopoly, distillers
required to sell entire manufacture oflMFL to KSBC only-KSBC not required
to pay excise duty to manufacturers of lMFL but pay it later when lMPD
moved out of its warehouse~Sales Tax Authorities requiring manufacturers of
IMFL to include amount of excise duty paid by KSBC in the turnover for the E
purpose of turnover tax--Correctness of-Held: Levy of duty is under Section
17(/) since the State intended to recover duty from KSBC on the issue of liquor
from its warehouses in course of its monopoly wholesale trade-Duty so levied
is not excise since taxing event envisaged in Section I 7(/) does hot relate to
manufacture-Amount of excise duty paid by KSBC is actually not excise duty F
in real sense but a privilege price and hence does not form part of turnover
of manufacturer-However rules were amended in 1999 contemplating that
KSBC to pay excise duty to manufacture at the time of purchase-Therefore,
with effect from 1999 that amount of excise duty would form part of
consideration to the manufacturer and included in their turnover for the purpose G
of levy of Turnover tax.

Liability to pay excise duty-Taxable event-Held: Use of words 'duty
of excise' in Section 17 of the Kerela Abkari Act is not conclusive and it is
91 H
92 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A for the courts to examine in each case as to whether it is in fact a 'duty of
excise '-Jn order that duty may be characterized as duty of excise, it must be
shown that it is a duty on manufacture of goods-If it is unrelated to the
manufacture of goods, it may be any other impost permitted by law, but would
not qualify as duty of excise.
B
The respondent is engaged in the manufacture and sale of Indian
Made Foreign Liquor (IMFL). Pursuant to the policy decision of the
Government of Kerela to create a monopoly in wholesale trade of IMFL,
a Government company was incorporated, namely Kerala State Beverages
C Corporation Limited (KSBC). Necessary amendments to the Abkari Act
and the relevant Rules were made with a view to effectuate this policy. In
view of monopoly created, the respondents could not sell IMFL
manufactured by them to anyone, and had to deliver the same to KSBC
only for which purpose they had to submit tenders each year for the
D various brands of IMFL manufactured by them. KSBC was granted
licence in Forms BWl and FL9 under the Bond Rules. The IMFL supplied
by the respondents/distillers was stored in bonded warehouses maintained
by the KSBC in accordance with the Bond Rules. KSBC also executed an
agreement in Form - A under which it was obliged to observe 'the
E provisions of the Abkari Act and not to remove goods without payment
of duty. The price paid by the KSBC to the respondents did not include
the element of excise duty which was later paid by the KSBC when the
liquor moved out of its warehouses.

Accordingly assessments were made from time to time on the basis
F that liability to pay sales tax and excise duty was on KSBC. The respondent
paid turnover tax on the basis of price paid to it by KSBC. It, therefore,
did not include the excise duty element while computing its total turnover.
However, Sales Tax authorities on 19.7.1998 called upon the respondent
to submit revised returns including element of excise duty paid by the
G KSBC. The High Court, on a challenge being made by the respondents
held that this excise duty which was in fact paid by KSBC would not be
regarded as being part of turn over of respondents for the purpose of levy
,of turn over tax and also declared that Section 2(xxvii) of the Kerala
General Sales Tax Act authorizing the levy of turnover tax on the amounts
H of excise duty paid by the KSBC on the distillers was unconstitutional and
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. 93
void. State filed appeal before this court. A

Pending the appeals on 1.4.2001 the State of Kera la amended Section
r 5(2C) of the Kerala General Sales Tax Act, by the Finance Act of 2001,
by adding an explanation which was brought into effect retrospectively
from July 1, 1987 stating that the distillery selling liquor manufactured
B
by it within the State to KSBC would be liable to pay turnover tax on the
turnover of sale of liquor by it to KSBC which shall include any duty of
excise liable on such liquor at the hands of such manufacturer whether
such duty is paid by the manufacturer or by the said Corporation.
The Sales Tax authorities issued notices to the respondents/distillers c
proposing to provisionally assess the turnover tax payable by the
manufacturers from April 2001 at various rates. The respondents/distillers
filed several writ petitions challenging the validity of Section 5(2C) of the
Kerala General Sales Tax Act read with Section 3A of the Kerala Finance
Act, 2001 as being unconstitutional, both in its retrospective and
D
prospective operation. They also challenged the consequent actions
initiated against them by th~ Sales Tax authorities. A Division Bench of
the Kerala High Court allowed these writ petitions. Aggrieved State came
up in appeal before this Court.

Disposing of the appeals, the Court E

HELD: 1.1. The duty on liquor is imposed under Section 17 of the
Abkari Act. There is no doubt that it is described as a 'duty of excise'.
The Government has a discretion to levy or not to levy such duty on all
liquor and intoxicating drugs in cases covered by clauses (a) to (g) of F
Section 17. Clauses (d) and (e) which relate to liquor manufactured under
any licence granted under Section 12 or manufactured at any distillery,
brewery, winery or other manufactory established under Section 14, no
doubt relate to imposition of duty of excise properly so called because the
duty levied on liquor manufactured under a licence granted under Section
G.
12 or 14 is duty on manufacture and will squarely fall within the meaning
of the term 'duty of excise'. However, clauses (b}, (c}, (t) and (g)
contemplate events which are not related to manufacture, such as liquor
permitted to be exported or permitted to be transported under clauses (b)
~
and (c) or liquor issued from a distillery under clause (t) or sold in any
H
94 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A part of the State under clause (g). If the duty of excise is levied under
Section 17 read with clauses (b), (c), (t) and (g) it may not be possible to
contend that what is levied is a duty of excise since the taxing event
envisaged under the aforesaid clauses do not relate to manufacture.
[133-B-E]
B 1.2. In the instant case the levy of duty is under clause (t) of Section
17 since the State intended to recover duty from KSBC on the issue of
liquor from its warehouses in course of its monopoly wholesale trade.
Section 18A which related to grant of exclusive or other privilege of
manufacturing or supply by wholesale etc. enabled the State to grant such
c privilege on the basis of annual rental by way Of consi~eration for the grant
of such privilege and the rental could be collected to the exdusion of or
in addition to the duty or tax leviable under Sections 17 and 18.
[133-E-G]

D 1.3. Thus, the levy of duty under Section 17 need not necessarily be
a duty of excise stricto sensu. In each case the Court has to consider
whether, having regard to the nature of.levy, it is a duty of excise or other
impost. The mere fact that a duty is described as a duty of excise in a
statute may not be conclusive, particularly when -there is a competing entry
E under which such a duty may be levied. In order that a duty may be
characterized as "duty of excise" it must be shown that it is a duty on
manufacture of goods. If it is unrelated to the manufacture of goods, it
may be any other impost permitted by law, but would not qualify as a
duty of excise. [133-G-H; 139-E]

F Synthetic and Chemicals Ltd and Ors. v. State of UP. and Ors., [1990]
1 SCC 109; Re : Central Provinces and Berar Sales of Motor Spirit and
Lubricants Taxation Act, 1938 : AIR 1939 FC 1 ; The Province of Madras v.
Messrs. Boddu Paidanna and sons AIR (1942) FC 33; Governor-General in
Council v. Province ofMadras, AIR (1945) PC 98; R.C. Jail v. Union ofIndia,
G [1962) Sppl 3 SCR 436; Re: The bill to amend Section 20 of the Sea Customs
Act, 1878 and Section 3 of the Central Excises and Salt Act, 1944: [1963] 3
SCR 787; Mis. Guruswamy and Co. etc. v. State a/Mysore and Ors., [1967]
1SCR548; Mis. Mcdowell and Co. Ltd v. C.T.0., [1977) 1SCC441; Mis.
Mcdowell and Co. Ltd v. C. T.O., [1985) 3 SCC 230; Mohan Breweries and
Distilleries Ltd v. Commercial Tax Officer, [1997) 7 SCC 542 and State of'
H
-,

STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. 95
).
Kera/av. Madras Rubbery Factory Ltd., [1998) 1 SCC 616, referred to. A
2.1. Perusal of various Notifications issued .from time to time under
Section 17 shows that different rates of duties have been prescribed for
different kinds of liquor. If the duty imposed was in the nature of excise
duty on manufacture, different rates could not have been· prescribed
depending upon whether it is sold in the market or consumed by the B
defence services personnel. Having regard to the language of the
Notifications it cannot be said that duty is levied on manufacturer because
Notifications suggest that such duty would be levied either on the goods
manufactured in the area or imported in the area. The duty levied on
import of liquor is referable only to Entry 8 of List II and not Entry 51 c
thereof. [135•B, F, G]

2.2. In accordance with the provisions of the Abkari Act and Rule
11 of the Foreign Liquor (Storage in Bond) Rules, 1961, goods purchased
by KSBC during the relevant period were without payment of excise duty
and the excise duty thereon was payable at the time of removal of goods D
from the bonded warehouse to FL9 premises. KSBC remitted turnover
tax on the total value of its turnover for each year at the rate of turnover
tax prevalent during the relevant year. The turnover of KSBC was
computed so as to include the value of the goods at which the supplies were
" received by them; excise duty and sales tax paid by them and profit E
margin. Therefore, the duty was levied at the stage of movement of the
goods from the bonded warehouse of KSBC to the FL9 premises and,
therefore, the levy of duty in terms of Rule 11 must necessarily be traced
to Section 17(t) which levied duty on liquor "issued from a distillery,
brewery, winery or other manufactory or warehouse licensed or F
established under Section 12 or Section 14". It would therefore not be
correct to contend that the duty was levied on manufacture only.
(136-B-E)

3.1. Thus, the duty imposed is not a duty of excise but represents
the privilege price charged by the Government from KSBC as a
G
consideration for parting with its exclusive privilege to sell liquor by
wholesale in the State of Kerala, the respondents are not liable to include
..(
that duty paid by KSBC in their turnover. [141-B)

-~ 3.2. However, the position changed radically with effect from H
'
I
I-
SUPREME COURT REPORTS .[2005) SUPP. I S.C.R.

A January 5, 1999. With effect from January 5, 1999, by amendment of the
Foreign Liquor Rules, KSBC was required to pay to the distillers/
manufacturers, the duty element levied under Section 17, before removing
the IMFL to its licensed premises. In view of the_ amendment, KSBC could
not purchase IMFL from the manufact~rers/distillers without payment of
B duty. Thus KSBC paid to the manufacturers 'the duty payable in ·respect
of IMFL and consequently the amount of ·duty paid formed part 'or the
consideration for whi~h the property in goods passed to KSBC. ThererJre,
~ . ~'.) ..
from January 5, 1999, the date with effect from which KSBC started
paying duty to the manufacturers/distillers b·~t6re lifting the stock' ~r' IMFL
1
to its own licensed premises, the amount of duty paid formed part 'or the
C consideration paid by KSBC to the manu.facturer~ _and consequently it
formed part of the turnover of the manufacturers. 1141-C, D, E, G] -

4.1. The contention of respondents ·that in' view o·r the provisions of
Secti~ns 5(1) and 5(2C) of Kerela General Sales Tax A ct~ th~re was no
1

D liability on the manufacturer of liquor to pay turnover tax ·on the sale of
IMFL has no merit. T~e levy of tax under Kerela General Sales Tax Act
is by virtue of Section 5. Section 5(1) deals with levy of Sales Tax, whilst
Section 5(2C)(i). Under Section 5(1)(i) of Kerala General Sales Tax Act,
tax is payable (a) on goods specified in the First and Second Schedule, (b)
E at the rates and '(c) at the points specified against such goods ill the said
Scti'edules. However, under Section 5(2C) which is the chargin_g Section
"Notwithstanding anything contained in' this Act or the Rules" "every
dealer shall pay turnover tax." Thus, no dealer is exempted from paying
turnover tax. The turnover tax is to be paid "as specified hereunder", and
not at rates and at points specified in the Fi~st Schedule. The rate is
F specified in (2C)(i)(b) at 5% on the turnover at all points. The words "By
any dealer" only go with "in Foreign Liquor (Indian made) or Foreign
Liquor (Foreign made). The First Schedule deals with "goods in respect
of which a single point of tax is leviable under sub-section (1) or sub-section
(2) of Section 5". The four columns in the First Schedule set out (1) the
G Serial Number, (2) Description of goods, (3) Point of levy and (4) Rate of
Tax - %. In the First Schedule there is no column for dealer. The reference
' '
to a dealer is only in column (3) which will ir~icate, the P.Oint of time at
which a dealer will pay tax. If under the charging S~ction.th~, poin.t of time
is not to be as per the First Schedule, then one will not consider column ,_
H (3) at all. This is clear as the only items are ''goods", "point of levy" and
--
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. 97
"Rate of Tax - •1.". Whilst co~sidering point and rate at which levy is to A
be made under Section 5(l)(i) the levy and rate will be as per the First
Schedule but under Section 5(2C)(i)(b) the levy is at all points and at 5%
of the turnover. It is only If one has to see at wh~t point and at what rate
the levy is to be made that one will take columns (3) and (4) of the First
Schedule into consideration. As against this under Section 5(2C)(i) the B
turnover tax is on "Foreign Liquor" specified in entries 53 and 54, i.e., in

J-- column (2) of entries 53 and 54. Thus, in Section 5(2C)(i) there is no
reference to columns (3) and (4) .or the First Schedule. This is clear from
the fact that under Section 5(2C), which is the charging Section, turnover
tax is payable by "all dealers". The term "dealer" is defined in Section
2(viii) and admittedly covers the Respondents. (142-A, B, G; 143-A-GI
c
4.2. If submission on behalf of the Respondents is accepted and it is
held that the words "as specified in entries against serial numbers 53 and
54 of the First Schedule" go with the words "by any dealer", even then
und!r column (3) of Entries 53 and 54 of the First Schedule the relevant D
words are "by a dealer who is liable to pay tax under Section 5".
Admittedly, the Respond~nts are dealers who are liable to pay tax under
Section 5. They only get exempt from paying tax under Section S(l)(b)
,.. because the sales tax is to be paid "af the rates" and "only at points
·, specified against the goods in the First Schedule". Under column (3) of E
the First Schedule in entries 53 and 54 the points of levy are (a) for KSBC
the point of levy is at time of sale, (b) by a dealer, who is liable to tax
under Section 5, the levy is at point of first sale. However, if the first sale
.
I
\
· is to KSBC then at that point there is no levy under Section 5(l)(b) because
the charging Section provide that the levy is to be as per the Schedule. F
Section 5(2C)(i) does not lay down that tax is to be paid at the point and
at the rate specified against the goods in the Schedule. Under Section
5(2C)(i) the tax is at the rate of 5% on the turnover at all points.
1
(144-B, c', D)

5.1. Thus the Respondent would in any event be liable to pay G
turnover tax on their turnover. High Court, was right in holding that the
/
amendment of Section 5(2C) of the Kerala General Sales Tax Act by
adding an explanation which was brought into effect retrospectively from
July I, 1987, did not remove the constitutional invalidity in the statute
~
because in view of the finding recorded by the High Court that the H
98 . SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

--: A manufacturers w~re not liable to pay exci~e d~ty, an amendment to the
Sales Tax Act could serve no purpose 1mless lacuna 'was removed by
appropriate amen~men_t to ihe Abkari Aet: u'the Act ht1posing'the' levy
did not impose upon the manufacturers the liability to pay excise duty, ';
. . ~ .. t t ~ . ·' .
by an amendment of th~ Sales _Tax Act the same co~ld not be included ·in
B their turnover. (144-E, F, G, H; 145-A]

5.2. Respondents - manufacturers/ distillers are liable to pay turnover
tax. It is. declared that the respondents - manufacture.rs are liable to
....
include in their turnover the amount of duty paid to them by KSBC and
C included in the consideration for sale of IMFb to KSBC with effect from
January 5, 1999 and pay the turnover tax accordingly. (145-A, -BJ

Mohan Breweries and Distilleries Limited v. Commercial .Tax Officer. A

Madras and Ors., (19971 7 SCC 542; A.B. Abdulkadir and. Ors. v. The State
of Kera/a and Anr., (19671 Supp. 2 SCR 741;_ R.C. Jail v. Union ofln~ia,
D (1962) Supp. 3 SCR 436; Mcdowell and Co. ~td. v. C.T.O., (1985] 3 SCC
230; State of Kera/a v. Madras Rubber Facto1y, (19981 I SCC 616 and
Deputy Commissioner of Sales Tax (Lall), _B9ard of Revenue_ (Taxes),
Ernakulam v. Hindustan P,etroleum Corporation- (2000) 10 SCC. 535;
Hindustan Petroleum Corporation. v. State of Kera/a, (1989) STC ,106; Mis.
E South. Travancore Distilleries and Allied Products, Trivandrum v. State of
Kera/a dated 2nd August, 1989 by Ker~la High C~urt; Sou_thern
Pharmaceuticals & Chemicals v. State ofKera/a, AIR (1981) SC 1863; Moni •·'
,.__
Simon v. State of Kera/a, (1984) KLT-1060;.State of Punjab and Anr v. Mis. l

Devans Modern Breweries and Anr (2003) J'f (10) 485 and Synthetics and )-
F Chemicals Ltd. and Ors. v. State ofU.P. and Or;s., (1990) 1SCC109, referred
to.

CIVIL APPELLATE
•
JURISDICTION :t Civil Appeal
.
Nos.. 2249-2257
of 2000.

From the Judgment and Order•. dated 27 .11.99 of the Kerala High Court
G
3283/99, 7437/99 and 19686 of 1999.
.
.r ·'.
in O.P. Nos. 23008/98-L, 23903/98-U, 818/99, 2255/99,.
,

~ .2764/99, 12893/99,
·-

·WITH
C.A. Nos. 95, 102, 622/2003, 3160doo5, 5099, 5100, 510i, 5102,
H 5103, 6515, 6516, 7952, 7954 of 2003.
i '
STATEOFKERALA v.MAHARASHTRADISTILLERIESLTD.[B.P.SINGH,J.] 99'

T.L.V. Iyer, John Mathew, K.R. Sasiprabhu and Ms. Indra with him for A
the Appellants.

F.S. Nariman and Ashok H. Desai, V. Giri, Ms. Indu Malhotra, Ms.
Madhu· Sweta, Ms. Anjali K. Venna, Niraj Gupta, Ms. Liz Mathew, E.M.S.
Anam and Fazlin Anam with them for the Respondents.
B
The Judgment of the Court was delivered by
.
B.P. SINGH, J. Leave granted in Special Leave Petition (C) No. 1032
of 2003.

In these two batches of appeals, a common question arises, inter alia C
for consideration by this Court, namely - Whether. the incidence of excise
duty, having regard to the provision of the Kerala Abkari Act and the relevant
Rules, falls upon the manufacturer/distiller such as the respondents herein
and therefore includable in their turnover for the purpose of levy of turnover
tax,_ or whether the incidence of excise duty falls on the Kerala State Beveragc:s D
(Manufacturing and Marketing) Corporation Limited, a Government company '
which alone is liable to pay the excise di.it}' 'on Indian Made Foreign Liquor,
and consequently the said component is not inchidable in the turnover of the
respondents/distillers? ,·

Thes·e appeals came up for. hearing before a 3 ·Judge Bench of this E
Court. After hearing the parties for sometime, by order dated -October 17,
200 l, it was observed that the point .involved was .an important one and it
would be appropriate if the cases are heard by a Larger bench. The referring
Bench observed thus :-

"The question which arises for consideration in these cases is, F
whether the excise duty levied· under the provisions of:,,the Kerala
Abkari Act on Indian Made Foreign Liquor which is manufactured
fonns part of the turn over of the manufacturer for •the purpose of
levy of turn over tax under the relevant provisions of the Kerala Sales
Tax Act?
G
The liquor which is manufactured l:iy the respondents has to be
sold to the Beverages Corporation which· can be regarded as sole
selling agent or the canalizing agenc'y. The liquor manufactured is
removed to the bonded warehouse of the Beverages'Corporation. At
the. time when the liquor is removed from that bonded warehouse, thi.:
H
100 SUPREME COURT REPORTS (2005] SUPP. I S.C.R.

A excise duty is paid by the Beverages·Corporation.

In the notices which were sent to the respondents, it was stated
that this excise duty which was paid by the Beverages Corporation
really forms part of the tum over of the respondents in the sale of
liquor by them to the Beverages Corporation and, therefore, tum over
B tax was payable on this element as well. The contention of the State
was that this exci~~·duty was really an obligation of the manufacturer
and merely because the obligation was discharged by the Beverages
Corporation would not mean that the same would not form part of the
tum over of the manufacturer.

c The High Court, on a challenge being made by the respondents,
decided in their favour and came to the·conclusion that this excise
duty which was In fact paid by the Beverages Corporation would not
be regarded· as being part of their tum over for the purpose of levy
of tum over tax.

D Mr. T.L.V. Iyer, learned senior counsel has drawn our attention
to a decision of this Court in the case of Mohan Breweries &
Distilleries Ltd v. Commercia/'Tax Offif.er, Madras and Ors., [1997)
7 SCC 542. In that case this Court was concerned with the levy of I
/ tum over tax in respect of liquor which was produced and sold to the. '
State Marketing Corporation. It is the contention of Mr. Iyer that th~ · .
E -to"
provisions of the Jaw in Tamil Nadu relating to the levy of this tax
is more or less parimateria with the corresponding provisions of law
in Kerala. In particular, reliance was placed on paragraph 7 of the
aforesaid decision which reads as follows:

'7. Excise duty is levied upon goods manufactured or produced
F
(Entry 84 of List I and Entry 51 of List II of the Seventh Schedule
to the Constitution). Its in.cidei1ce falls, therefore, on the '
manufacturer or producer of the goods. The collection of excise I
;
duty may be deferred to such later stage as is, administratively j
I
or otherwise, most convenient'. r
G '..
Basing itself on the aforesaid observations, this Court concluded '
that even if Rule 22 of the Tamil Nadu Rules provides for realization
of the excise duty from the Corporation that was only a convenient
method of collection, the primary obligation to pay excise duty being
only of the manufacturer. Mr. Iyer, therefore, contended that following
~
H the said decision the appeals should be allowed.
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] I0 I

-· Mr. F.S. Nariman, learned senior counsel for the respondents has
drawn our attention tp three Constitution Bench decisions of this
Court. In the case of A.B. Abdullcadir and Ors. v. The State of Kera/a
A

and Anr., [ 1967) Supp. 2 SCR 741, where at page 751 it was observed
as follows :

'It may also be accepted that generally speaking the tax is on the B
manufacturer or the producer, though it cannot be denied that laws
are to be found which impose a duty of excise at stages subsequent
to the manufacture or production. •

(emphasis added)
c
In R. C. Jail v. Union of India, [ 1962) Supp. 3 SCR 436, at page
451, it was contended that the excise duty cannot be legally levied on
the consignee who had nothing to do with th~ manufacture or
production of coal. This argume~t was repelled and at page 451, it
was observed as follows :
D
'Excise duty is primarily a duty on the production or manufacture
of goods produced or manufactured within the country. •tis an indirect
duty which the manufacturer or producer passes on to the ultimate
consumer, that is, its ultimate incidence will always be on the
consumer. Therefore, subject always to the legislative competence of E
the taxing authority, the sa~d tax can be levied at a convenient stage
so long as the character of the impost, that is, it is a duty on the
manufacture or production, is not lost. The method of collection does
not affect the essence of the duty but only relates to the machinery
of collection for administrative convenience.'

In Mis. Guruswamy & Co. Etc. v. State of Mysore and Ors., F
[1967) 1 SCR 548, at page 562, another Constitution Bench held as
follows :

'These cases establish that in order to be an excise duty (a) the
levy must be upon 'goods' and (b) the taxable event must be the G
manufacture or production of goods. Further the leliy need not be
imposed at the stage ofproduction or manufacture but may be imposed
later."

(Emphasis added)
~·
H
102 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

J{- · Relying ..upon the aforesaid observations of this Court, in cases
referred to hereiriabove, Mr. Narimari contends that the observations
·ofthis Court in M~han Breweries"ca'se'(supra) seem to run counter ..
10· the'earlie~ decisions of the Constittition Benches. He submits that
the Constitution Benches have laid down in no uncertain terms that
an excise
,..,..., ... duty need not necessarily
. be regarded
. as being
. a levy only
B ~ . : . .

'
duty may . be
. .. .. '.
on the manufacturer and it is possible for a law to provide that excise
.
levied not on. the manufacturer
' " '
but at a later point of
~. . ' ~ ··, .
time. He, therefore, contends that the observation to the contrary in
Mohan Breweries ' case does not reflect the position in law correctly
·and he.submits that in the present cases, on a correct interpretation
c of Sections 17 and 18 of the Abkari Act of Kerala, it must be held
that t~~· le.vy of excise duty, is iiot on the manufacturer but is at the
stage when the liquor is removed by the Beverages Corporation from
the ·warehouse and therefore' 'the' same cannot form part of the
respondents' turn over:

D In our opinion, the point involved is an important one and it
would be appropriate· if this and the connected cases are heard by a
larger Bench: '

We direct, the papers be laid before Hon'ble the Chier'Justice'for
appropriate orders."·

Th~~ is how these appeals have been placed by the Hon'ble Chief I.
Justice before this Bench for disposal.
! • ~ . • •
·

The first bateh of appeals arise out ~f writ petitions filed in the years
1998 - 1999 which were disposed of by a common judgment and order of a
F Divisio_n \Bench of the High Court dated 27th November, 1999 in OP Nos.
23008-239,03/98, 818, 2255, 2264, ~.2.893, 32.83; 7437 and 19686/99 whereby
the High Court allowed the writ petitions filed by the respondents/distillers
holding inter alia that under the Scheme of the Kerala Abkari Act and the
Rules, the incidence of excise duty on the manufacture of Indian Made Foreign
Liquor was required by law to be borne by the Kerala Beverages Corporation
G to whom the liquor was sold at a price which did not include the element of
excise duty. Consequently the State ofKerala and its officers were not entitled
to levy turnover tax on the respondents/distillers by including in their turnover
the exci~e duty payable on the liquor manufactured and sold by the
respondents/distillers to the Kerala State Beverages Corporation. The High
H Court also declared that Section 2(xxvii) of the Kerala General Sales Tax'Act
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 103

JI> authorizing the levy of turnover tax on the amounts of excise duty paid by A
the Kerala State Beverages Corporation on the distillers was unconstitutional
and void.

After the judgment of the High Court in the first batch of writ petitions,
and while the appeals against the said judgment and order were pending
before this Court, on 1.4.2001 the State of Kerala amended Section 5(2C) of B
the Kerala General Sales Tax Act, by the Finance Act of 2001, by adding an
explanation which was brought into effect retrospectively from July 1, 1987
which reads as follows :-

"Explanation : For the removal of doubt it is hereby clarified that any
distillery in the State which sells liquor manufactured by it within the c
State to the Kerala State Beverages Corporation shall be liable to pay
turnover tax on the turnover of sale of. liquor by it to the said
Corporation and the turnover for the purpose of this sub-section shall
include any duty of excise liable on such liquor at the hands of such
manufacturer whether such duty is paid by the manufacturer or by the D
said Corporation."

Since the Sales Tax authorities issued notices to the respondents/distillers
proposing to provisionally assess the turnover tax payable by the manufacturer~
from April 2001 at various rates, the respondents/distillers filed several writ
petitions challenging the validity of Section 5(2C) of the Kerala General E
Sales Tax Act read with Section 3A of the Kerala Finance Act, 2001 as being
unconstitutional, both in its retrospective and prospective operation. They
also challenged the consequent actions initiated against them by the Sales
Tax authorities. A Division Bench of the Kerala High Court allowed these
writ petitions by a common judgment and order of August 9, 2002 in OP
Nos. 3736, 5139, 1705, 4464, 6075, 6113, 6116, 6122, 6239, 6336, 7639, F
7666 of 2002 and 31153 of 2001. The Division Bench disposing of the
aforesaid writ.petitions did not agree in principle with the law as laid down
in the earlier judgment disposing of the first batch of writ petitions and was
of the view that the incidence of excise duty fell squarely on the respondents/
distillers and as such was includable in their total turnover for purpose of G
computation of turnover tax under the Kerala General Sales Tax Act. However,
the Division Bench held itself bound by the earlier decision rendered by the
High Court and, therefore, following the earlier decisitm held that by adding
..
an explanation to Section 5(2C) by the Kerala General Sales Tax Act the .~

constitutional lacuna pointed out in the earlier judgment had not been removed
H
104 SUPREME COURT REPORTS [2005) SUPP. I S.C.R.

A by appropriate amendment to the Kerala Abkari Act. By merely adding the
explanation to Section 5(2C) of the Kerala General Sales Tax Act, the excise
duty element ·paid by the Corporation could not be added to the turnover of
the respondents/distillers since it had been held in the earlier judgment that
excise duty was leviable only on the purchaser, namely, the Kerala State
B Beverages Corporation.
In this view of the matter the High Court allowed the writ petitions and
declared that the explanation appended to Section 5(2C) of the Kerala General
Sales Tax Act was unconstitutional and invalid both in its prospective operation
from 1st April, 2001 and in its retrospective effect from 1st July, 1987.
c · OP No. 1477112002 out of which C.A. No. 7954 of 2003 arises was
also disposed of in the same terms by the High Court by its order dated
August 12, 2002.

To appreciate the rival contentions of the parties iris necessary to refer
D; to the relevant provisions of the Kerala Abkari Act and the relevant Rules as
also the provisions of the Kerala General Sales Tax Act, 1963. The provisions
have to be viewed in the light of the policy decision of the Government of
Kerala to create a State monopoly in manufacture, wholesale purchase and
sale of Indian Made Foreign Liquor (IMFL) with effect from 1.4.1984. A
Government company ·was incorporated; namely Kerala State Beverages
E (Manufacturing and Marketing) Corporation Limited (Kerala Beverages I
Corporation). Necessary amendments to the Abkari Act and the relevant (
Rules were made with a view to effectuate this policy. The respondents/ }
distillers could not, in view of the monopoly created in favour of the Kera la I

State Beverages Corporation, sell IMFL man~factured by them to anyone,
F and had to deliver the same to the Kerala State Beverages Corporation for
which· purpose they had to submit tenders each year for the various brands
of IMFL manufactured by them. The Kerala State Beverages Corporation
was granted licence in Forms BWI and FL9 under the Bond Rules. The
IMFL supplied by the respondents/distillers was stored in bonded warehouses
maintained by the Kerala State Beverages Corporation in accordance with the
G Bond Rules. The Kerala State Beverages Corporation also executed an
agreement in Form - A under which it was obliged to observe the provisions
of the Abkari Act and not to remove goods without payment of duty. The
price ·paid by the Kerala State Beverages Corporation to the respondents/
distillers did not include the element of excise duty which was later paid by
H the Kerala State Beverages -Corporation when the liquor moved out of its
STATEOFKERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH,J.] 105

warehouses. A
In view of the policy to create a State monopoly, and having regard to
the Scheme of the Kerala Abkari Act and the relevant Rules, the respondents/
distillers contended that the Kerala Abkari Act did not impose a liability on
the respondents/distillers to pay excise duty since such a liability was imposed
only on the Kerala State Beverages Corporation which actually paid excise B
duty payable on the IMFL. Consequently the element of excise duty did not
form part of the turnover of the respondents/distillers and was therefore not
includable in the total turnover of the respondents/distillers for purpose of
computation of turnover tax payable by them under the Kera la General Sales
Tax Act.
c
The Kerala Abkari Act was formerly known as Cochin Abkari Act
enacted in the year 1902. It applied to the territories comprised within the
State of Cochin but with effect from I Ith July, 1967, by Act IO of 1967, the
provisions of the Act were extended to the whole of the State of Kerala.
Chapter IV of the Act deals with manufacture, possession and sale of liquor. D
The relevant part of Section 12 reads as follows :-

"12. (l) Manufacture of liquor or intoxicating drug prohibited except
under the provisions of this Act:- No liquor or intoxicating drug shall
be manufactured.
E

except under the authority and subject to the terms and conditions of
a licence granted by the Commissioner in that behalf, or under the
provisions of Section 21;
F

Section 14 deals with establishment and control 6f distilleries, Beverages,
warehouses etc. and provides as follows :-

"14. Establishment and control of distilleries, breweries, warehpuses,
etc. :- The Commissioner may, with the previous approval of the
Government:-

(a) establish public distilleries, breweries or wineries, or authorize the
establishment of private distilleries, breweries, wineries or other
manufactories in which liquor may be manufactured under a license H
106 SUPREME COURT REPORTS [2005] SUPP. l S.C.R.

A granted under this Act;

(b) establish public warehouse or authorize the establishment of private
warehouses wherein liquor may be deposited and kept without paym~nt
of duty under a license granted under this Act; ·

B (c) discontinue any public or private distillery, brewery, ·winery or
other manufactory or warehouse so established;

(d) prescribe the mode of supervision that may be necessary in a
distillery, brewery, winery or other manufactory or warehouse so
established, or in any other manufactory where preparation containing
C liquor or intoxicating drugs are manufactured, to ensure the proper
collection of duties; taxes and other dues payable under this Act or
the proper utilization of liquor or intoxicating drugs;

D Chapter v. of the Act deals with duties, taxes and rentals. Sections 17
and 18, which are relevant, provide as follows :-

"17. Duty on liquor or intoxicating drugs :- A duty of excise or
luxury tax or both shall, if the Government so direct, be levied on all
liquor and intoxicating drugs
E (a) permitted to be imported under Section 6; or

(b) permitted to be exported under Section 7; or

(c) permitted under Section 11 to be transported ; or

(d) manufactured under any licence granted under Section 12; or
F
(e) manufactured at any distillery, brewery, winery or other
manufactory established under Section 14; or
. 1
(f) issued from a distillery, brewery, winery or other manufactory or
warehouse licensed or established under Section 12 or Section
14; or
G
(g) sold in any part of the State ;

Provided that no duty or gallonage fee or vend fee or other taxes shall
be levied under this Act on rectified spirit including absolute alcohol
which is not intended to be used for the manufacture C\f potable
H liquor meant for human consumption.
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.) 107

Explanation :- For the purpose of this section and Section l S, the A
expression "duty of excise", with reference to liquor or intoxicating
drugs, include countervailing duty on such goods manufactured or
produced elsewhere in India and brought into the State."

"IS. How duty may' be imposed :- (I) Such duty of excise may be
levied: B
(a) in the case of spirits or beer, either on the quantity produced in
or passed out of a distillery, brewery or warehouse licensed or
; established under Section 12 or Section 14 as the case may b~ or in
' accordance with such scale of equivalents, calculated on th~ quantity
of materials used or by the degree of attenuation of the wash or wort C
or on the value of the liquor as the case may be as the Government
may prescribe ;

D
Section I SA of the Act provides as follows :-
;
"I SA. Grant of exclusive or other privilege of manufacture, etc., on
payment of rentals :- (I) it shall be lawful for .the Government to
grant to any person or persons, on such conditions and for such E.
period as may deem fit, the exclusive 9r other privilege-

(i) of manufacturing or supplying by wholesale; or
(ii) of selling by retail; or

(iii) of manufacturing or supplying by wholesale and selling by retail,
any liquor or intoxicating drugs within any local area on his or F
their payment to the Government of any amount as rental in
consideration of the grant of such privilege. The amount of rental
may be settled by auction, negotiation or by any other method as
may be determined by the Government from time to time, and
may be collected to the exclusion of, or in addition, to the duty G
or tax leviable under Sections 17 and l S.

(2) No grantee of any privilege under sub-section (1) shall exercise
th.e same until he has received a licence in that behalf from the
Commissioner.

• H
108 SUPREME COURT REPORTS [2005) SUPP. I S.C.R.

A (3) In such cases, if the Government shall by notification so direct,
the provisions of Section 12 relating to toddy and toddy producing
trees shall not apply."

We may notice at this stage that Section 17 has been amended with
effect from April 1, 2003, to the effect that the words "if the Government so
B directs", and clauses (b), (c), (f) and (g) stand deleted.

In exercise of powers conferred by Section 29 of the Abkari Act the
Government of Kerala has framed Rules for the establishment and working
of Distilleries, Warehouses and Excise Depots for regulating the· issue and
<
C transport of spirits known as the Kerala Distillery and Warehouse Rules,
1968. Rule 47 which deals with removal of spirits from distilleries and
warehouses provides as follows :-

"47. Removal of spirits from distilleries and warehouses. - Spirits
may be issued from distilleries and warehouses.
D {I) Under bond

(a) for export to any other State in India or to any place out of India
or to any other licensee subject to such restrictions and to payment
of such amounts as may be prescribed by the Government from
time to time.
E
(b) for transport to another distillery or warehouse, licensed under
these rules or to the warehouse licensed under the Foreign Liquor
Storage in Bond Rules, 1961.

(2) On payment of duty or gallonage fee or vending fee or other
F taxes, for consumption within the State to licensees authorized to
purchase the same.

(3) Without payment of duty and without bond or on payment of
such reduced rates of duty, taxes or fee as may, from time to time,
be prescribed by the Government (in the case of spirits other than
G denatured spirits) if sold to officeis of Government or other persons
specially exempted from payment of duty or taxes or fees in full or
part and empowered to purchase them.

(4) From distilleries, only, free of duty but on payment of gallonage
fee or vending fee or taxes as may be prescribed by the Government,
H after denaturation under the rules prescribed under the Act."
STA TE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] } 09

.. Rule 50 deals with removal under Bond and reads as follows :- A
"50. Removals under bond. - When spirits are removed from the
distillery or warehouse without payment of duty, the dist.iller or
warehouse keepers shall execute bond for the payment of duty on
them at the prescribed rate in case of his failure to account for them
to the satisfaction of the Commissioner. In the case of spirits exported, B
bond shall be executed with one or more sureties."

The relevant part of Rule 52 provides as follows :-

"52. To whom issues for local consumption may be made. - (1)
Indian Made Foreign Spirit may be issued for consumption within the C
State only to the FL9 licensees in the State.

Foreign Liquor Rules, 1953 have. also been framed under Sections IO,
24 and 29 of the Cochin Abkari Act. Rule 13 sub-rule 9 which deals with D
issue of licenses in Form FL9 reads as follows :-

'.'(9) License for possession and supply of foreign liquor in wholesale
by the Bonded Warehouse Licensees to Foreign Liquor-I Licensees,
Foreign Liquor-3 Hotel Restaurant Licensees, Foreign Liquor-4 Club

- Licensees, Foreign Liquor-4A Club Licensees, Foreign Liquor 11
Beer/Wine parlour licensees and Foreign Liquor-12 Beer retail sale
outlet licensees in the State :- Licenses in Form FL9 shall be issued
by the Excise Commissioner, only to the Kerala 'state Beverages
E

(Manufacturing and Marketing) Corporation Ltd., possession licenses
in Form BWl under the Foreign Liquor (Storage in Bond) Rules,
1961 on payment of an annual rental of Rs.25,00,000 (Rupees twenty F
five lakhs only) ......"

The aforesaid sub-rule was amended by the Government of Kerala by
Notification dated 5th January, 1999. By the said amendment in the heading
the words "by the Bonded Warehouse licensees" were omitted. Similarly in
the first sentence the words "possessing licences in Form BWl under the G
Foreign Liquor (Storage in Bond) Rules, 1961" were omitted. In Form FL9
in the h-eading, the words "BY THE BONDED WAREHOUSE" were omitted.
This amendment was brought about by the Government to avoid duplication

--
'
of work. Under the unamended provision the KSBC had to keep the stock of
IMFL in the Bonded Warehouses and when the stock was taken out for H
110 SUPREME COURT REPORTS (2005] SUPP. 1 S.C.R.

A supply to other licensee.s: excise ~~ty had to be paid by the aforesaid
Corporation. This system was done away with and by amendment of sub-rule
9 of Rule 13 .the KSBC was obliged to pay the excise duty on the IMFL to
the manufacturer and thereafter stock duty paid liquor for supply to other
licensees.
t
B This fact has been noticed by the High Court in its judgment in the first
batch of writ petitions. The Court after noticing the said amendment observed
that with effect from 5th January, 1999, in view of'the amendment of the
Foreign Liquor Rules, the KSBC had been purchasing IMFL from the
manufacturers after payment of excise duty. All s.ales of liquor by the
C manufacturers to the Corporation took place after the excise duty had been
remitted by the KSBC with the result that the system of B<;mded Warehouse
in so far as IMFL is concerned was done away with. ·The KSBC paid excise
duty on IMFL before it purchased the same from the concerned manufacturer
and therefore the amount of excise duty was paid by the Corporation when
it purchased IMFL from the manufacturer. The amount of excise duty paid
D formed part of consideration for which the property in the goods viz. IMFL
was purchased by the Corporaticsn froni the manufacturer concerned. It ·was
only after payment of the excise duty that the goods were consigned to the
concerned FL9 licensed premises owned and controlled by the KSBC.

The Rules next to be noticed are the Foreign Liquor (Storage in Bond)
E Rules, 1961 which have been framed under Sections 14(d) and 29(2) of the
Cochin Abkari Act. Under the Rules "bonded warehouse" means a warehouse
where foreign liquor is stored in bond. Sub~section (vi) of Section 2 explains
the words '~to store foreign liquor in bond" as under :-

"with all its grammatical variations means .to store, deposit;;or keep
F foreign liquor in a bonded warehouse without payment of the excise
duty payable thereon."

Rule 3. provides as follows :-

"3 (a) Any person.desiring to store in bo~d foreign liquor shall make
G an application for a licence in that behalf to the Commissioner of
Excise through.the co~cerned officer-in~cha~ge~ofthe Excise Division.
The application shall contain the following particulars namely :-
. '
(1) name and address of the applicant in the case of a firm or
company, the names and addresses of.the partners or directors ')Ill
·H I
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH,J.] 111

should be furnished ; A
(2) name and address of the place where foreign liquor is to be
stored or bond together with the description and the correct plan
of the building or rooms to be used as a warehouse in triplicate;
(3) the maximum quantity of each kind of foreign liquor required
to be stored in bond at any one time ; B
(4) the date from which the applicant desires to store foreign
liquor in bond ;
(5) whether the applicant is prepared to deposit the amount of
security fixed by the CoJilmissioner of Excise as a guarantee for C
the observance of the provisions of the Act and the Rules and
orders made hereunder;
~·

(6) whether the applicant holds a wholesale licence granted under
the Cochin Foreign Liquor Rules.

(b) the applicant shall execute an agreement in Fonn A undertaking D
to abide by the provisions of the Act and the Rules and orders made
thereunder and the conditions of the licence and also agreeing to pay
the prescribed duty therefor.

(c) the applicant shall take out a licence in Fonn FL.9 appended to
the Rule for the levy of gallonage fee, etc. and for the issue of E
licences· for the sale of foreign liquor, punished under Notification
No. S.R.4 1859/52/RD dated 17 .1.1953, as subsequently amended,
for the supply of foreign liquor in wholesale to the other foreign
L ,
l liquor licensees.

Provided that nothing contained in sub-rule (c) shall be applicable F
to the applicant for a licence in Form BWl(A).

Rule 3(b) refers to the execution of an agreement in Fonn A. The
relevant part of Appendix incorporated therein is as follows :-

"Now the condition of this bond is that if the obliger(s) shall G
observe all the provisions of Abkari Act, the Rules, Notifications and
Orders thereunder and the Foreign Liquor (Storage in Bond) Rules,
1961 and in particular shall deposit all Foreign Liquor allowed to be
imported to the bonded warehouse in a storeroom or other place of
storage approved by the Commissioner (hereinafter referred to as H
112 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A "licensed premises") and shall not remove or issu~ from the licensed ..
premises before the proper duty or fee, if any has been paid, any
. Foreign ~iquor except as provided for in the sai~ Rules.

And if the obliger(s) pay/pays into the Government Treasury all
dues whether excise duty or fees payable by the obliger(s) under the
B provisions of the Cochin Abkari Act 1 of 1077 and the Rules and
Orders made thereunder and complies with dirth (sic) all.the provisions
of the said Act, the said Rules and the Orders and Notifications
issued thereunder.

This obligation shall be void but otherwise and on breach in the
C performance of all or any of the tenns and conditions herein contained
the same shall be in full force.

Rules 11 and 14 are also relevant which read as follows :-
D
"11. ( 1) Foreign liquor stored in the bonded warehouse shall be
removed only to the premises licensed under the 'F.L. 9 licence referred
to in sub-rule (c) of Rule 3, held by the bonded warehouse licensee,
and such removal shall be only unaer cover of a pass granted in that
behalf and on payment ofthe Excise duty due. Foreign Liquor intended
E for export to foreign countries on the strength of the export
authorization from the Government of India shall also be brought and
stored in the Bonded Warehouse and the removal therefrom shall be
only under cover of a pass granted in that behalf. The pass shall be
granted on the execution a bond to pay excise .duty at full rate payable '
·~

on the quantity not exported as evidenced from the certificate from
F
the "customs authority" of the port of export.

Provided that nothing contained in sub-rule (1) shall be applicable to
the licensee in Fonn BW l(A).

G (2) If the licensee wants to issue or remove any quantity of foreign
liquor from the bonded warehouse, he shall make an application to
I
the Officer-in-Charge of the Excise Division through the Officer-in-
Charge in that behalf."

"14. A licence in Form BWl shall be granted to the Kerala State
H Beverages (Manufacturing and Marketing) Corporation Limited and
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 113

a licence in Form BWI (A) shall be granted to the Canteen Stores A
Department, Ministry of Defence for the purpose of storage in Bond
and supply of Foreign Liquor including beer in wholesale to the FL-
9 licensees and FL-8 licensees respectively under the Foreign Liquor
Rules, 1953."

Under the Kerala Abkari Shops (Disposal in Auction) Rules, 1974 as B
amended with effect from lst April, 1989, Rule 3(1A) provides as follows:-

"3(1 A). The Kerala State Beverages (Manufacturing and Marketing)
Corporation Limited shall have the exclusive privilege to obtain FL-
9 Licence for the purpose of distribution of Foreign Liquor to Foreign C
Liquor l Licensee, Foreign Liquor 3 hotel (Restaurant) Licensees,
Foreign Liquor 4 Club.Licensees, Foreign Liquor 4A Club Licensees,
Foreign Liquor 11 beer/wine parlour Licensees, Foreign Liquor 12
Beer Retail Sale Outlet Licensees and Foreign Liquor, 6 Special
Licensees in the State."
D
From the above provisions it will be seen that the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited have the exclusive
privilege to obtain FL-9 licence for the purpose of distribution of IMFL. A
licence in Form BWl is also required to be granted only to the said
Corporation. The aforesaid Corporation has also executed an agreement in
Form A as contemplated by Rule 3(b) of the Bond Rules, 1961. To give E
effect to the monopoly created in favour of the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited the respondents/distillers
are required to supply IMFL to the said Corporation under a rate contract.
Offers are required to be made in sealed covers which are subject to certain
conditions. The format in which the offers are to be made is titled 'Data F
Sheet' which ineludes all necessary particulars. A clause in the data sheet
provides a:; follows:-

"The above rate includes freight, insurance, export duty, CST, B-
deposit, packing charges, handling charges, unloading charges,
warehouse, other levies etc., but does not include Kerala Import Duty, G
Kerala Excise Duty and Kerala Sales Tax."

As we have noticed earlier, with effect from January 5, 1999, by
amendment of the Foreign Liquor Rules, KSBC was required to pay to the
distiilers/manufacturers, the duty element levied under Section 17, before
H
114 SUPREME COURT REPORTS (2005] SUPP. I S.C.R.

--.A removing the IMFL to its licensed premises.
We may now briefly refer to the facts of the cases before us. The
representative facts are taken from the writ petition filed by Mis. Kerala
Distilleries and Allied Products Ltd., now renamed as Maharashtra Distilleries
Limited as per the Scheme of Amalgamation sanctioned by the High Court
B of Kerala. The aforesaid petitioner is engaged in the manufacture and sale of
IMFL. It is registered as dealer both under the Kerala General Sales Tax Act.
1963 and the Central Sales Tax Act, 1956. Pursuant to the policy of the
Government creating a monopoly in favour of the Kerala State Beverages
(Manufacturing and Marketing) Corporation Limited, the petitioner has been
C submitting tenders as required for sale and supply ofIMFL. The prices quoted
of the various brands of IMFL do not include the sales tax or the excise duty
since it was only the Kerala State Beverages Corporation which was liable to
pay the tax. Excise duty was not paid by the petitioner (respondent herein)
since the IMFL was required to be delivered to the ~erala State _Beverages
Corporation and no excise duty was payable by the petitioner (respondent
D herein). The offer made as per the requirement of the tender document clearly
stipulated that the price quoted did not include excise duty.

Accordingly assessments were made from time to time on the basis that
liability to pay sales tax and excise duty was on the Kerala State Beyerages
E Corporation. The petitioner (respondent herein) paid turnover tax on the basis
of price paid to it by the Kerala State Beverages Corporation. It, therefore,
did not include the excise duty element while computing its total tumov~r
having regard to the entry at SL No.53 of the First Schedule of the Kerala
General Sales Tax Act. Some of the assessments were finalized upto the year
1995-96. However, Sales Tax authorities on 19th July, 1998 called upon the
F petitioner to submit revised returns including element of excise duty paid by
the Corporation. A notice was also issued proposing to impose penalty for
less payment of turnover tax having regard the fact that the tum over did not
include the element of excise duty payable on the lMFL. The petitioner filed
its objections on 15th September, 1998 but without giving serious
G consideration, an order of the assessment for the period April to July, 1998
was made and order imposing penalty was also passed. Thereafter the Deputy
Commissioner of Commercial Tax issued a notice on 28th September, 1998
for the years 1991-92 to 1995-1996 in exercise of powers under Section 35
of the Kerala General Sales Tax Act on the ground that the assessments made
were prejudicial to the interest of the revenue inasmuch as the assessing
H authority did not take into account the element of excise duty paid by the
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 115

- .fourth respondent, namely the Kerala State Beverages (Manufacturing and A
Marketing) Corporation Limited and did not levy turnover tax on the petitioner.
A follow-up notice was issued calling upon the petitioner (respondent herein)
to produce books of account relating to the years in question. In these
circumstances the petitioner (respondent herein) filed the writ petition praying
for quashing of the proceedings and for declaration that it was not liable to B
pay the turnover tax on the amount of excise duty paid by the Kerala State
Beverages Corporation on IMFL sold by it to the Corporation. The levy of
turnover tax on such amount of excise duty was sought to be quashed as
being ultra vires and beyond the legislative competence and· therefore
unconstitutional.

The State in its counter-affidavit contended inter alia that the excise
c
duty paid by the Kerala State Beverages Corporation formed part of the sale
turnover of the manufacturer, since it is the obligation of the manufacturer to
pay excise duty, though it may be discharged by others. Relying upon the
decision of this Court in Mohan Breweries and Distilleries Limited v.
Commercial Tax Officer, Madras and Ors., [1997] 7 SCC 542 it was contended D
that excise duty element formed part ofthe total turnover which was chargeable
, to turnover tax under Section 5(2C) of the Kerala General Sales Tax Act,
1963.

The Kerala State Beverages Corporation which was respondent No.4 in E
, the writ petition accepted the fact that the excise duty on IMFL purchased by
it from the petitioner (respondent herein) was paid by it and the same is
included in its price which it realized as a wholesale dealer from its purchasers,
and the turnover of the Corporation is computed on that basis and the turnover
tax paid accordingly.
F
The turnover tax was introduced with effect from July 1, 1987 by
amendment of the Kerala General Sales Tax Act, 1963. The turnover tax was
then payable only by those dealers who were not liable to pay sales tax on
any goods under Section 5(1) of the Act. However, by amendment of August
1, 1991. turnover tax was made payable by every dealer in foreign liquor on
the turnover as specified at all points. Section 5(2A) of the Act was renumbered G
as Section 5(2C) with effect from April 1, 1998 which provided that every
dealer in Foreign Liquor (Indian Made) shall pay turnover tax on the turnover
1
of goods as specified in entries against Serial Nos. 53 and 54 of the First
Schedule @ 5 % on the turnover at all points.
H
116 SUPREME COURT REPORTS (2005] SUPP. ~ S.C.R.

A At this stage we may notice the relevant provisions of the Kerala General
Sales Tax Act, 1963. "Turnover" has been defined under the Act and the
relevant part thereof reads as follows·:-

" 'turnover' means the aggregate amount for which goods are either
bought or sold, supplied or distributed by a dealer, either directly or
B 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 the sale by a person of agricultural or
horticultural products, grown by himself. or grown on any land in
which he has an interest whether as owner, usufructuary, mortgage,
c tenant or otherwise, shall be excluded from his turnover."

Section 5 provides for the levy of tax on sale/purchase of goods with
which we are not directly concerned but the relevant part thereof may be
noticed :-

D "5. Levy of tax on sale or purchase of goods :- (1) Every dealer
(other than a casual trader or agent of a non-resident dealer) whose
total turnover for a year is not less than. 'two lakh rupees and every
casual trader or agent of a non~resident dealer, whatever be his total
turnover for the year, shall pay tax on his taxable turnover for that
year.
E
(i) in the case of goods specified in the First or Second Schedule, at
the rates. and only at the points specified against such goods in the
said Schedules;
,,
F
The relevant part of Section 5(2C) reads as follows :-

"5(2C) (i) Notwithstanding anything contained·. in this Act or the
Rules made thereunder every dealer shall pay turnover tax on the
turnover of goods as specified hereunder, namely :-
G
(a) by an oil company defined in the Explanation under serial number
97 of the First Schedule to this Act whose total turnover in a
year exceeds rupees fifty lakhs at the rate of three percent on the
turnover from the 1st day of April, 1991 till 31st day of July,
1991 and thereafter at the rate of four percent on the turnover ;
H
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.) 117

(b) by any dealer in Foreign Liquor (Indian made) or Foreign Liquor A
(Foreign made) as specified in entries against serial numbers 53
and 54 of the First Schedule at the rate of five percent on the
turnover at all points;

"
B
The entry against Serial No.53, which is relevant is to the following
effect :-

"53. Foreign liquor At the point of sale by the Kerala State

(Indian Made) Beverages (Manufacturing and Marketing) C
Corporation Limited and at the point of
first sale in the State by a dealer who is
liable to tax under Section 5 (except where
the sale is to the Kerala State Beverages
(Manufacturing and Marketing)
Corporation Ltd." D
In the first batch of writ petitions which were disposed of by a Division
Bench by its judgment and order of November 27, 1999 it was held that
Entry 51 of List II of the 7th Schedule of the Constitution of India is only
the source of power for the legislature concerned empowering it to enact a
law for the levy·of excise duty on consumable alcohol manufactured within E
the State. Excise duty, though an incidence of the manufacture of goods, it
was not axiomatic that the manufacture of goods would immediately result
in a liability of excise duty merely on the wording of Entry 51 in List II. The
liability of excise duty depended on the charging provision in the statute
providing for such levy.
F
In the instant case, Bonded Warehousing Licence in Form FL9 had ·
been issued only to the Beverages Corporation which was constituted as the
sole marketing agency for the purchase and distribution of IMFL. Rule 11 of
· !he Stor.~~e in Bond Rules permitted removal of IMFL from bonded warehouse
only to premises licensed under FL9 Licence, under cover of a pass on G
payment of excise duty due. Levy of excise duty was, therefore, traceable to
Section l 7(f) of the Act. These two provisions have to be read together.

The Beverages Corporation had executed a bond under which it had
! bound itself to pay excise duty payable on the IMFL. Therefore, the statutory
H
118 SUPREME COURT REPORTS [2065] SUPP. 1 S.C.R.

· A provisions read together do not contemplate payment of excise duty on IMFL
by the manufacturer within the State at any stage prior to the removal from
the warehouse of the Beverages Corporation. Under such circumstances it -
was impossible for the manufacturers to pay the excise duty at any stage after
the manufacture of goods and before its removal from the distillery to the
B bonded warehouse of the Beverages Corporation in course of sale effected in
favour of the said Corporation. The manufacturer lost control over the goods
in question and property passed on from the distillery to the Beverages
Corporation.

The levy of excise duty in terms of Section l 1(f) of the Act read with
C Rule 11 of the Storage in Bond Rules constituting the charging provision of
the excise duty under the Abkari Act came into operation at a stage after the
property in the goods, namely the IMFL manufactured by the distillers had
been transferred in favour of the Beverages Corporation. In other words the
charging provision under the Act came into operation at a point of time
subsequent to the transfer of property in goods in favour of the Beverages
D Corporation. Under such circumstances it was difficult to accept the argument /
that the amount payable by way of excise duty necessarily became part of the
turnover of the manufacturers.

On such reasoning the High Court held that the manufacturers/ distillers
E were not required to pay excise duty which never formed part of their turnover.
The finding of the High Court has been summarized in paragraph 41 of the
judgment, which is as follows:-

"(i) that a duty of excise is leviable under Section 17 either at the
point of manufacture or at the point of issue from a manufacturer or
F warehouse. The choice is that of the Government. '

(ii) that the duty may be imposed either on the quantity produced or
passed out from a distillery, brewery or warehouse.

(iii) for ad-valorem the value is such at which the Fourth respondent
G purchases from the suppliers.

(iv) The petitioner does not have any license except for Compounding,
Blending and Bottling in Form No.1 in Form No.2 and Form 4.

(v) The fourth respondent is the exclusive marketing organization in
H
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.) 119
the State of Kerala and all sales have to take place to the said A
organization.

(vi) The fourth respondent alone holds license in FL9 and is alone
competent to have a Bonded Warehouse granted under BWI. They
have executed requisite Bond in Form A and entered into an agreement
with the Government for payment of duty of excise. B

(vii) Duty is imposed and collected when the 4th respondent removes
goods from its Bonded warehouse under Rule 11 ( l) of the Bond
Rules. At that point duty is paid by the fourth respondent in discharge
of its statutory liability to pay the duty.
c
(viii) Under the provisions of Section 5 read with Serial No.53 of the
First Schedule of KGST Act, the sale by the fourth respondent is the
first sale attracting tax. In other words the sale by the petitioner to the
Fourth respondent is not treated as a sale ·liable to tax.
D
(ix) That there is no necessity to submit monthly/ Quarter/Half yearly
or Annual Returns to the Excise Authorities on the part of the
petitioner. In other words the petitioner is not subjected to any
assessment made under the provisions of the Kerala Abkari Act or
Rules made thereunder."
E
The High Court, therefore, allowed the writ petitions.

The State of Kerala preferred the instant appeals before this Court but
pending the disposal of the appeals, it amended Section 5{2C) of the Kera la
General Sales Tax Act by the Finance Act of 2001 adding an explanation
with a view to remove any doubt. We have earlier quoted the explanation F
which was brought into effect retrospectively from July 1, 1987 and which
clarified that any distillt!ry in the State which sells liquor manufactured by it
within the State to the Kerala State Beverages Corporation shall be liable to
pay turnover tax on the turnover of sale of liquor by it to the said Corporation
and the turnoYer for, the purpose of this sub-section shall include any duty of G
excise liable on such liquor at the hands of such manufacturer whether such
duty is paid by the manufacturer or by the said Corporation. In view of the
__ amended provision, proceedings were again initiated by the Sales Tax
... - auth_orities and the same were again challenged before the High Court.
H
120 SUPREME COURT REPORTS (2005) SUPP. I S.C.R.

A The second batch of writ petitions was disposed of by a common
judgment and order of the High Court dated August 9, 2002. The High Court
while disposing of the second batch of writ petitions considered the binding
precedents on the subject and observed that irrespective of the manner in
which the rules and agreements between the parties changed the point of
B collection, excise duty in its true character is always a duty payable by the
manufacturer of an article and remains the liability of the manufacturer. If as
a result of the rules and the agreements it is discharged by someone else such
discharge must be held on account of the manufacturer himself. The learned
Judges referred to the decision of this Court in Mohan Breweries and
Distilleries Limited (supra) which according to the learned Judges squarely
C governed the case. After noticing several judgments of this Court the learned
Judges were not inclined to agree with the view of the earlier Bench on this
aspect of the matter, but finding themselves bound by, the earlier decision,
they proceeded to dispose of the writ petitions on the basis that the
manufacturers/distillers were not liable to pay turnover tax under the Abkari
D Act. It held that the earlier judgment could not be said to have been rendered
per incuriam because the judgment was rendered after considering the binding
judgments of the Supreme Court. The High Court also noticed the fact that
appeals were pending before· this Court against the judgment in the first batch
of writ petitions.

E Having held itself bound by the judgment of the High Court in the first
batch of writ petitions, it held that the explanation to Section 5(2C) of the Act
did not advance the case of the State because once it is held that the provisions
of the Abkari Act read with the Rules framed thereunder did not cast the
liability for payment of excise duty on foreign liquor· sold· in the state of
F Kerala op _the manufacturers and that the payment of'excise duty was the
liability of the Beverages Corporation, the explanation added to Section 5(2C)
did not change the legal position unless the Abkari Act was suitably amended
. • t '

so as to impose the liability of payment of excise duty on the manufacturers/
distillers. The explanation introduced by way of amendment was a futile
attempt to revalidate the levy without curing the inherent constitutional
G disability.

It, however, negatived the plea of the manufacturers/distillers that the
levy of turnover tax under Section 5(2C) of the Act in so far as it deals with
foreign liquor can only be on the sale I turnover of the dealers as specified
H in Entry 60 of the First Schedule (corresp0nding to Entry 53). It held that the
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 121

_, reference to Serial No. 60 (Serial No. 53 in the first batch of writ petitions) A
of the First Schedule is only with a view to ascertaining the description of the
type of foreign liquor sold. The words "as specified hereunder" under Section
5(2C) of the Act must be read as qualifying the substantive goods and not as
qualifying the substantive dealer. This was because the said entry in the First
Schedule describe the person on whom the levy falls and the points at which B
the levy falls. The rates were also prescribed. Moreover sub-section (2C)
started with a non obstante clause "notwithstanding anything contained in
this Act or the Rules made thereunder". Thus the payment of turnover tax
under sub-section (2C) was not subject to restrictions enumerated in sub-
section (I) and sub-section (2) of Section 5 of the Act. One such restriction
pertains to the number of points at which the levy can be made. On an C
interpretation of the aforesaid provision it recorded a categoric finding that
the contention of the manufacturers/distillers that the levy of turnover tax fall
on the Beverages Corporation and not on them was not acceptable.

Learned counsel appearing on behalf of the State of Kerala drew our D
·"'°'· attention to the provisions of the Abkari Act and the various other Rules
which have been noticed earlier in the judgment. He submitted that it is not
in dispute that upto 1.4.1984 the excise duty on the manufacture of liquor
was being paid by the distillers/manufacturers like the respondents. With
effect from l.4.1984 the KSBC came into existence and a monopoly was
/ created in its favour for wholesale marketing in foreign liquor. The E
manufacturers/distillers were obliged to sell their products to the aforesaid
Corporation which distributed the same to the retailers all over the State. In
view of the powers conferred by Section 17 of the Abkari Act Notifications
levying the excise duty were issued from time to time which cast the liability
to pay excise duty on the distillers/manufacturers under the Abkari Act. He F
has drawn our attention, in particular, to 2 Notifications being SRO No. 60/
61dated18.3.1961 and SRO No. 330/96 which came into force on 1st April,
1996. The first of these Notifications shorn of unnecessary details is to the
effect that in exercise of the powers conferred by Section 17 of the Abkari
Act, the Government of Kerala directed that the duty under the said Section
shall be levied on the following kind of liquors manufactured in the area G
where the said Act is in force or manufactured elsewhere in India and imported
into the said area by land or under bond by sea, at the rates mentioned against
each kind of liquor. The first item mentioned is Indian Made Foreign Spirits
except Indian Made Foreign Spirits consumed by Defence Services. The
second Notification is in similar tenns wherein in exercise of powers conferred H
122 SUPREME COURT REPORTS [2005) SUPP. I S.C.R.

A by the Sections 6, 7, 17 and 18 of the Abkari Act the Government of Kerala
directed that the import and export fees, the excise duty and luxury tax under
the said sections shall be levied on the following kinds of liquors manufactured
in the State and exported outside the State under bond in force or manufactured
elsewhere in India and imported into the State by land, air or sea under bond,
B at the rates mentioned against each kind of liquor. The first item mentioned
under the heading - kind of liquor - is "Indian Made Foreign Liquor including
beer except those consumed by Defence Service". He submitted that similar
Notifications were issued in exercise of powers conferred by Section 17 of
the Abkari Act which leave no room for doubt that the levy of excise duty
was on the manufacture of liquor in the State. He, therefore, pointed out that
C having regard to the Notifications issued in exercise of power~ conferred
under Section 17 of the Abkari Act, what was levied was excise duty on
IMFL manufactured in the State. The liability to pay excise duty, therefore,
. was that of the manufacturer. He relied upon Rule 47 of the Kerala Distillery
and Warehouse Rules, 1968 whereunder no liquor ~ould move out of the
D di~tillery premfses except on payment of excise duty or under bond executed
by the distillery undertaking to pay the excise duty. The incidence of execution
of bond was itself proof of the fact that the liability to pay excise duty was
cast on the distillers or the manufacturers. Relying upon sub-rule (l) of Rule
16 of the Kerala Distillery and Warehouse Rules, 1968 it was submitted that
the definition of "warehouse" clearly meant that part of a distillery where
E spirits for issue are kept. The warehouse referred to in Rule 47 related to the . __
warehouse in the distillery where the distillery _kept liquor produced by it
before it was removed therefrom. After the monopoly was created in favour
of KSBC with effect from 1.4.1984 the liquor stored in the warehouse of the
distillery was removed under bond to the Corporation bonded warehouse
F licenced in Form BWI under the Storage and Bond ~ules. Corporation also
was required to execute a bond in Form A undertaking to pay the excise duty.
He, therefore, submitted that the liability to pay excise duty was clearly on
the manufacturers/ distillers. The amendment made to the Rules only enabled
the KSBC to procure IMFL from the manufacturers without payment of
excise duty and stock the same in its bonded warehouses. The liability to pay
G excise duty which was cast on the manufacturer was never shifted. That
liability arose at the point of manufacture and there was no amendment to the
relevant statutory provision whereby the liability to pay excise duty was _
~ shifted from the manufacturers to the KSBC. As a matter of convenience the
amended rules provided for payment of excise duty, which was the primary
H liability of the manufacturers, by the KSBC and therefore it was the liability
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 123
_ of the manufacturer which was discharged by the KSBC. Reliance was placed A .
on a decision of this Court in Mohan Breweries and Distilleries Limited
(supra) and Modowell & Co. Ltd v. C. T 0., [ 1985] 3 SCC 230 and State of
Kera/a v. Madras Rubber Factory, [1998] 1 SCC 616 and Deputy
Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v.
Hindustan Petroleum Corporation, [2000] 10 SCC 535. Reliance was also B
placed on a Full Bench decision of the Kerala High Court in Hindustan
Petroleum Corporation v. State of Kera/a : (1989) STC 106. Counsel also
placed reliance on two pivision Bench decisions of the Kerala High Court in
TRC No. 92 of 1987 Mis. South Travancore Distilleries and Allied Products,
Trivandrum v. State of Kera/a, dated 2nd August, 1989 wherein it was held
that the liability to pay excise duty was on the manufacturer which has not C
been shifted by law from the manufacturer to the KSBC. The duty discharged
by the KSBC would still formed part of the deposit and total sale turnover
of the manufacturers. According to him this judgment was approved by this
Court by dismissal of CA No. 3020 of 1990 by order dated October 24, 1990.
This \Court held : D ,
"On our aforesaid finding that the demand of sales tax on excise duty
which would have merged into price to be charged by the manufacturer
/
to the Corporation, the liability for tax on excise duty should be taken ..
as final against the appellant."
E
Reliance was placed on the decision of the Division Bench in OP
No.9295of1989 decided on April 12, 1991. He, therefore, submitted that the
law is well settled that excise duty is a tax on the manufacture of goods and
this liability falls on the manufacturer though its collection may be deferred
to a later stage upto the stage of consumption. He also relied upon various
decisions of this Court in support of this proposition. He further submitted F
that the use Of the words "if the Government so directs" in Section 17 of the
Abkari Act only gives to the Government the discretion to levy or not to levy
the excise duty. It has no relation to the stage at which the excise duty was
to be levied or collected. The liability arose once the Government directs to
levy the duty and issues Notification in that regard. The collection may be . G
at one or the other points referred to in clauses (c) to (g). The charging
section itself imposes the liability on all those mentioned in.clauses (c) to (g)
all of which are related to manufacture. According to him all that is required
is for the Government to evince its intention by levying the duty by appropriate
,.. Notification. Such Notifications have been issued from time and time and
H
124 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A those Notifications specified that duty is imposed on the manufacturer of
IMFL. That the excise duty liability is of distiller is also evident from the fact
that the duty payable is on the value/sale price of t~e liquor sold by the
distillery to the KSBC and not on the basis of the sale price of the KSBC to
retailers. He, therefore, submitted that the amendment of the Rules, particularly
B the (Storage in Bond) Rules, did not shift the liability of the manufacturer
under the Notification issued under Section I 7 of the Abk~ri Act. It only
enabled the IMFL to be removed from the distillers warehouse to the premises
of the FL9 licensees namely, the KSBC under the cover of a pass granted in
that behalf and on payment of excise duty. The excise duty liability has never
been obliterated or dispens.ed with by statutory provision. The liability
C continued and only the collection was postponed in cases where the liquor
was removed from the bonded warehouses of the distillers to the bonded
warehouses of the KSBC without payment of excise duty.

He further submitted that in view of the Government's order dated 5th
January, 1999 the Foreign Liquor Rules were amended and, thereafter the I
D KSBC was obliged to pay the excise duty at the time of purchase itself so that
what was stocked in the premises of the KSBC was duty paid IMFL. There
could be i:io doubt that thereafter the excise duty element formed part of the
sale price of the distillers yet the High Court in the first batch of writ petitions
granted relief in very broad terms ignoring this aspect of the matter. He
E further submitted that the tax did not offend Article JI I of the Constitution
of India and there was no violation of Article 304(1) inasmuch as there was
no discriminatory levy on liquor imported from outside the State, to which
locally manufactured liquor was not subject. It was also submitted that what
was levied under the Act was excise duty and not price paid for the privilege
F of grant of exclusive right to manufacture and market liquor. Lastly it was
submitted that Entry 53 of the First Schedule to the Kerala General Sales Tax
Act read with Section 5(2C) of the Act levied turnover tax on sales of IMFL
at all points by the dealers. Entry 53 did not govern Section 5(2C) which
began with a non obstante clause and reference to Entry 53 in the aforesaid
Section is only to the definition of foreign liquor in that entry. The section
G applied to the goods referred to in Entry 53 and had no reference to the
dealers by whom tax was payable because the turnover tax on foreign liquor
was payable by all dealers on all points of sale.

Mr. Nariman appearing on behalf of the respondents submitted that the
H levy of duty on l;quor was not referable to Entry 5 I of List II but falls under
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 125
-t
Entry 8 of List II of the Seventh Schedule. He submitted that a close A
ml examination of Section 17 of the Abkari Act will reveal that the Government
has a discretion to impose the levy, and the taxable events are those enumerated
in clauses (a) to (g) which include levy on liquor permitted to be imported
or exported or transported or manufactured under any licence granted under
Section 12 or manufactured at any distillery, brewery, winery or other
B
manufactory established under Section 14 or issued from a distillery. brewery,
winery or other manufactory or warehouse licensed or established under

-
Section 12 or Section 14, or sold in any part of the State. He submitted that
the duty of excise is levied on the manufacture of the goods. The levy
contemplated by clauses (a) to (g) of Section 17 is not necessarily connected
with manufacture of liquor, as it also envisaged the levy of duty on liquor c
exported or transported under clauses (b) and (c) or even issued from the
distillery as contemplated by clause (f) or sold in any part of the State as
contemplated by clause (g). Levy under these clauses cannot be characterized
as levy of excise duty because they are not related to the manufacture of
goods. Section 18 prescribes how duty can be imposed and in essence the
D
basis of duty under the Abkari Act is either on the quantity produced in, or
pa~ed out of, a distillery, brewery or warehouse. The Section, therefore,
gives a discretion to the State to impose such duty either on a distillery or
brewery or warehouse. Excise duty in essence is a duty on manufacture but
Section 18(A) of the Act.also contemplates grant of exclusive or other privilege
of manufacturing or supplying by wholesale on payment of rentals. Section E
l 8(A) is an enabling provision and apparently the levy under Section I 8(A)
which was inserted in 1964 must fall under Entry 8 of List II. The State is
enabled to part with its privilege of manufacturing or supplying liquor in
wholesale or of selling in retail. Since the levy is relatable to Entry 8 of List
II it cannot be construed as a levy of excise duty on manufacture in terms of
F
Entry 51 of List II of the Seventh Schedule of the Constitution of India. He,
therefore, submitted that the levy under Section 17 or l 8(A) of the Abkari
Act is not levy of excise duty stricto sensu though it is loosely so described
in the Abkari Act.
~
He submitted that there is a line of decisions which holds that ordinarily G
excise duty is the liability of the manufacturer unless the law provides
otherwise. These decisions were, however, rendered in the context of excise
duty properly so-called. The character of a levy is not to be determined
merely by the words used in a statute bu~ in a wider sense i.e. the nature of
'-
the levy. Relying upon the decisions of this Court in Southern Pharmaceuticals
' H
and Chemicals v. State of Kera/a, AIR (1981) SC 1863 and Synthetic and
126 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.
I
A Chemicals ltd. and Ors. v. State of U.P. and Ors., [I 990) I SCC 109 and of I

the Kera/a High Court in Moni Simon v. State of Kera/a, ( 1984) KL T 1060, \~
he submitted that these cases disclose an approach which was different while
dealing with a duty under Section 17 of the Abkari Act, than while dealing
with the levy of excise duty stricto sensu. The levy under Section 17 not
B being strictly speaking in the nature of duty of excise, the liability of the
Corporation has not to be determined on any preconceived notion of levy of
excise duty i.e. the liability must fall on the manufacturer, but on the language ,.,,
of Section 17 which makes it clear that it does not fall under Entry 51 of List
II. At best the levy is relatable to Entry 8 of List II. There can be no excise
<'·. duty on sale or supply as contemplated by Section 17. Therefore, the liability
C to pay the duty was on the KSBC and not on the manufacturer. He also
referred to the Notifications issued by the State which went on to show that
the levy was not in the nature of excise duty. An essential element of excise
duty is uniformity of incidence which cannot vary from Notification to /
Notification. The Scheme of the Act itself supports the inference that though
D it is imposed under the Abkari Act, yet it is not a duty of excise on manuf~cture,
but a consideration for parting with State's privilege, referable to Entry 8 of
·ust II.

Before the High Court the same submission was advanced on behalf of
the Respondents which is noticed in paragraphs 44 and 46 of the judgment,
E but no finding has been recorded by the High Court on this aspect of the
matter.

Alternatively, and assuming without conceding, that the duty imposed
is excise duty, Mr. Nariman submitted that the observations in Mohan
Breweries (supra) that the incidence of excise duty falls on the manufacturer
F or producer of the goods is not a rule of universal application, as it must
depend upon the words the statute employs. He relied upon decisions of this
Court in support of his submission 'that the incidence of excise duty may fall
on a person other than the manufacturer, if the statute so provides. In the
present case, he submitted that upto the time the Abkari Act was amended in
G 2003, it gave an option to the Government to levy excise duty on liquor
either on the manufacturer who was licensed under Section 14 or on the issue
ofthe liquor from the warehouse of the licensed warehouse keeper. According ._
to him, the licensed warehouse keeper referred to in Section 14(f) means the '
KSBC. According to him the KSBC being the sole and exclusive warehouse

H
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.) 127

keeper under the Government order of February 1, 1984 read with Rule 11 A
of the (Storage in Bond) Rules, it was the KSBC on which the duty to pay
the duty was imposed. Under Rule 11(1) of the aforesaid Rules the foreign
liquor stored in the Bonded Warehouse could be removed only to the premises
licensed under the FL9 licence, and the FL9 licence could be issued only in
favour of the KSBC. Since the primary obligation to pay excise duty under B
the Abkari Act is that of the licensee of the foreign liquor bonded warehouse
and the License in Form FL9 could be issued only to the KSBC, the liability
was squarely on the aforesaid Corporation. Rule 3(l)(b) of the (Storage in
Bond) Rules, 1961 imposes the primary obligation to pay the duty under the
Abkari Act on the licensee of a foreign liquor bonded warehouse. Only the
KSBC held the licence in Form FL9 as also BWl , and also executed an C
agreement in Form A agreeing to pay the prescribed duty. The aforesaid
Rules constitute the direction contemplated by Section 17 of the Abkari Act.
The liability to pay the duty is clearly cast on the KSBC.

He submitted that a close examination of Section 17 of the Act would D
reveal that the duty imposed under it is not necessarily leviable on the
manufacturer. There are so many other categories. Sections 17 and 18 also
give to the Government an option as to how the duty is to be imposed and
on whom, whether on the distillers/manufacturers or warehouse owners. He
relied upon the provisions of the Abkari Act and the relevant Rules and
·submitted that the Government has chosen to impose the liability on the E
KSBC and not on the manu~acturer. The Government had the power to do so.
The licence issued to the KSBC obliged it to pay all excise duties which was
a condition of the licence and, therefore, the payment of excise duty by the
KSBC was not on behalf of anyone else but in tern}s of its own licence.
F
He further submitted that if payment of excise duty made by the
Corporation is treated as made on behalf of the manufacturer on the hypothesis
that the excise duty liability is that of the manufacturer, it must follow that
the payment of turnover tax by the Corporation must be similarly treated as
having been made on behalf of the manufacturer. He submitted that if the
turnover tax on excise duty is paid by the Corporation on its own behalf, then G
it cannot be treated as part of the turnover of the manufacturer. However, if
the excise duty is to be treated as paid on behalf of the manufacturer, then
it must follow that the turnover tax on that duty must also be treated as
i having been paid on behalf of the manufacturer. Therefore, there could be no
additional liability on the manufacturer to pay turnover tax since the same H
128 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A had already been paid by the Corporation.
Mr. Ashok Desai, Senior Advocate appearing on behalf of some of the
respondents supplemented the arguments advanced by Shri Nariman and
submitted that having regard to the scheme of the Abkari Act and the Rules,
B the exigibility to the dut)' of excise was on KSBC which has the sole marketing
and monopolistic rights as from 1st April, 1984. In fact that is how the
authorities also understood the law till the judgment _in Mohan Breweries
(supra) case. According to him under the legal frame work the duty of excise
can be paid only by the Corporation and not by the distillers. He also referred
. '
to the various provisions of the Act and the relevant Rules in support of his
C arguments. He also submitted that on a strict construction of the taxing statute
there can be no levy of turnover tax at all on the manufacturers. Reading
Sections 5(1) and 5(2C) of Kerala General Sales Tax Act with the Schedule
to the said Act he submitted tliat the manufacture~ was not liable to pay
turnover tax by including in his turnover the amount of excise duty payable
D by KSBC. Relying upon the judgment of this Court in State of Punjab and
Anr v. Mis. Devans Modern Breweries and Anr., (2003) JT (10) 485, he also
submitted that all the rights relating to liquor are vested in the State and the
State may part with the privilege for a consideration. The levy of duty by the
State of Kerala in the instant case was really the consi~eration for which the
State parted with its privilege in favour of the aforesaid Corporation.
E
We shall first take up for consideration the submission urged on behalf
of the State of Kerala that the levy of duty in the insant case is really a levy
of duty of excise under Section 17 of the Abkari Act. The scheme under the
"Rules, after KSBC was constituted, provided for collection of the said excise
F duty from the aforesaid Corporation as a matter of administrative convenience.
Liability, therefore, remained that of the distillers/manufacturers and only the
stage of collection of the said excise duty was deferred. On the other hand
counsel for the respondents submitted that the levy of duty in the instant
case, though under Section 17 of the Abkari Act was not levy of duty of
excise; though loosely so called. It was in effect the consideration for parting
G with exclusive privilege of the State ofKerala in favour ofKSBC for wholesale
trade in the business of liquor permissible under Sect_ion l 8A of the Abkari
Act and, therefore, payable only by the KSBC.

Mr. Nariman contended that even if the submission advanced by Mr.
H T.L.V. Iyer. that the collection of the duty of excise. may be deferred to a
later stage for the sake of convenience, may not be disputed, yet it must first
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 129

be shown that the duty levied is in reality a duty of excise. The mere fact that A
it has been described as a duty of excise is not conclusive unless it is also
shown that the duty is on manufacture. There is force in his contention
because the mere fact that a duty is described as a duty of excise i.n a statute
may not be conclusive, particularly when there is a competing entry under
which such a duty may be levied. It is, therefore, always a question for the B
Court to consider under which entry the tax falls. In Synthetics and Chemicals
Ltd and Ors. v. State of UP. and Ors ., [1990] I SCC 109 this Court has
taken judicial notice of the fact that in many statutes excise duty and price
of privilege were reg11rded as one and the same. This Court in paragraph 87
of the report observed :-
c
"87. On an analysis of the various Abkari Acts and Excise Act, it
appears that various provinces/States reserve to themselves in their.
respective States the right to transfer exclusive or other privileges
only in respect of manufacture and sale of alcohol and not in respect
of possession and use. Not all but some of the States have provided D
such reservation in their favour. The price charged as a consideration
for the grant of exclusive and other privileges was generally regarded
as an excise duty. In other words, excise duty and price for privileges
were regarded as one and the same thing. So-called privilege was
reserved by the State mostly in respect of country liquor and not
foreign liquor which included denatured spirit." E
Learned counsel for the parties have referred to several decisions of
this Court on the question as to what is the nature of a duty of excise. It may
be useful to refer to some of the decisions.

In Re : Central Provinces and Berar Sales of Motor Spirit and Lubricants F
Taxation Act, (1938) AIR 1939 FC l after considering the meaning usually
given to the term 'duty of excise' this Federal Court concluded :-

"But its primary and fundamental meaning in English is still that of
a tax on articles produced or manufactured in the taxing country and
intended for home consumption. I am satisfied that that is also its G
primary and fundamental meaning in India ; and no one has suggested
that it has any other meaning in Entry (45) ......... "

"The expression 'duties of excise', taken by itself, conveys no
H
130 SUPREME COURT REPORTS [2005] SUPP. l S.C.R.

A'· suggestion with regard to the time or place of their collection. Only
• the context in. which the expression is used can tell us whether any
referenc~ to the time or manner of collection is to be implied. It is not
d~nied that laws are to be found which impose duties of excise at
stages subsequent to manufacture or production; but, so far as I am
aware, in none of the cases in which any question with regard to such
B a law .has arisen was it necessary to consider the existence of a
competing legislative power,' su~h as appears in entry (48)."

Here again it was emphasized that the Courts are entitled to look at the
real substance of the Act imposing the duty, and w~at it does and not merely
C what it says in order to ascertain the true nature of the tax.

In The Province of Madras v. Messrs. Boddu Paidanna and sons : AIR
(1942) FC Jnhe Federal Court observed as under :-

:'There is in _theory nothing to prevent the Central Legislature from
D imposing a duty of excise on a commodity as soon as it comes into
existence, no matter what happens to it af~erwords, whether it be ·
sold, consumed, destroyed or given away. A taxing authority will not
ordinarily impose such a duty, because it is much more convenient
administratively to collect the duty (as in the case of most of the
Excise Acts) when the commodity leaves the factory fdr the first
E
time, and also because the duty is intended to be an indirect duty
which the manufacturer or producer is to pass on to the ultimate
consumer, which he could not do if the commodity had, for example,
been destroyed in the factory itself. It is the fact of manufacture
·which attracts the duty, even though it may be collected later."
F
In Governor-Genera/ in Council v. Province of Madras, AIR (1945)
PC 98 the Privy Council noticed the earlier decisions of the Federal Court
and rejected the contention before it that the power to impose a duty of
excise, which is given to -the Federal Legislat4re alone by Entry No. 45 of
G the Federal List, entitles that Legislature and. no other to impose a tax on first
sales of goods manufactured or produced in India. Their Lordships observed

"To their Lordships this contention does not appear well-founded.
The term "duty of excise" is a somewhat flexible one : it may, no
doubt, cover a tax on first and perhaps on other sales ; it may in a
H proper context have an even wider meaning. An exhaustive discussion
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [8.P. SINGH, J.] 131

of this subject, from which their Lordships have obtained valuable A
assistance, is to be found in the judgment of the Federal Court in
1939 F.C.R. 18. Consistently with this decision, their Lordships are
of opinion that a duty of excise is primarily a duty levied upon a
manufacturer or producer in respect of the commodity manufactured
or produced. It is a tax upon goods not upon sales or the proceeds of B
sale of goods. Here again their Lordships find themselves in complete
accord with the reasoning and conclusions of the Federal Court in the
Boddu Paidanna case. The two taxes, the one levied upon a
manufacturer in respect of his goods, the other upon a vendor in
respect of his sales, may, as is there pointed out, in one sense overlap.
But in law there is no overlapping. The taxes are separate and distinct C
imposts. If in fact they overlap, that may be because the taxing
authority, imposing a duty of excise, finds it convenient to impose
that duty at the moment when the exciseable article leaves the factory
or workshop for the first time upon the occasion of its sale. But that
method of collecting the tax is an accident of administration : it is not D
of the essence of the duty of excise which is attracted by the
manufacture itself."

In R.C. Jail v. Union of India, [1962] Sppl 3 SCR 436 this Court
noticed the earlier three decisions referred above and laid down the principle
as follows :- ·E

"With great respect, we accept the principles laid down by the said
three decisions in the matter of levy of an excise duty and the
machinery for collection thereof. Excise duty is primarily a duty on
the production or manufacture of goods produced or manufactured
within the country. It is an indirect duty which the manufacturer or F
producer passes on to the ultimate consumer, that is, its ultimate
incidence will always be on consumer. Therefore, subject always to
the legislative competence of the taxing authority, the said tax can be
levied at a convenient stage so long as the character of the impost,
that is, it is a duty on the manufacture or production, is not lost. The G
method of collection does not affect the essence of the duty, but only
relates to the machinery of collection for administrative convenience.
Whether in a particular case the 'tax ceases to be in essence an excise
duty, and the rational connection between the duty and the person on
whom it is imposed ceased to exist, is to be decided on a fair H
132 SUPREME COURT REPORTS [2005) SUPP. I S.C.R.

A construction of the provisions of a particular Ac!."

The next decision of this Court which may be notjced is the decision
of the Full Court in Re : The bill to amend Section 20 of the Sea Customs
Act, 1878 and Section 3 of the Central Excises r,md Salt, Act, 1944 [1963] 3
SCR 787 in which the law was stated in the following w~rds :-
B
,;This will show that the taxable event in the case of duties of excise
is the m~nufac~re of goods .and the duty is not ~irectly on the goods
but on the manufacture thereof. We may in this connection contrast
sales tax which is also imposed with reference to g.oods sold, where
C the taxable event is the act of sale. Therefore, though' both excise
duty and sales-tax are levied with refere_nce to goods, the two are
very different imposts ; in -one case the impositions is on the act of
manufacture or produ~tion while in the other it is on the act of sale.
In neither case therefore can it be said that the excise duty or sale tax
is a tax directly on the goods for in'that event they will really become
D the same tax. It would thus appear that duties o'f excise partake of the
nature of indirect taxes as known to standard works on economics
and are to be distinguished from direct taxes like taxes on property
and income."

E The principle was stated in some what similar terms in Mis. Guruswamy
and Co. etc. v. State of Mysore and Ors., [1967] 1 SCR 548 which is as
follows :-

'These cases estabilsh that in ord~r to be' an excise duty (a) the levy
must be upon 'goods' and (b) the taxable event must be the
F manufacture or production. of goods. Further' the levy need not be
imposed at the stage of production or manufacture but may be imposed
later."

The same principles have been reiterated in Mis. Mcdowell & Co. Ltd.
v. C.TO., [1977] 1SCC441; Mis. Mcdowell & Co. Ltd. v. C.TO., [1985]
G 3 SCC 230 ;_Mohan Breweries & Distilleries Ltd. v. Commercial Tax Officer,
[1997] 7 SCC 542 and State of Kera/a v. Madras Rubbery Factory Ltd.,
[1998] 1 sec 616.

We shall deal with the submissions urged on the basis of the decisions
H of this Court in Mohan Breweries (supra) and Madras Rubber Factory, (supra)
ST A TE OF KERALA ''· MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J .] 133

later. A
In the light of these principles we now proceed to examine the question
as to whether the imposition of duty in the instant case under Section 17 of
the Abkari Act was really a 'duty of excise'.

As we have noticed earlier the duty on liquor is imposed under Section B
17 of the Abkari Act. There is no doubt that it is described as a 'duty of
excise'. The Government has a discretion to levy or not to levy such duty on
all liquor and intoxicating drugs in cases covered by clauses (a) to (g) of
Section 17. Clauses (d) and (e) which relate to liquor manufactured under
any licence granted under Section 12 or manufactured at any distillery, C
brewery, winery or other manufactory established under Section 14, no doubt
relate to imposition of duty of excise properly so called because the duty
levied on liquor manufactured under a licence granted under Section 12 or
14 is duty on manufacture and will squarely falls within the meaning of the
term 'duty of excise'. However, clauses (b), (c), (f) and (g) contemplate
events which are not related to manufacture, such as liquor permitted to be D
exported or permitted to be transported under clauses (b) and (c) or liquor
issued from a distillery under clause (f) or sold in any part of the State under
clause (g). If the duty of excise is levied under Section 17 read with clauses .
(b), (c), (f) and (g) it may not be possible to contend that what is levied is
a duty of excise since the taxing event envisaged under the aforesaid clauses E
do not relate to manufacture. Learned counsel for the respondents, in particular,
emphasized clause (f) of Section 17 because it is their contention that in the
instant case the levy of duty is under clause (f) of Section 17 since the State
intended to recover duty from KSBC on the issue of liquor from its warehouses
in course of its monopoly wholesale trade. It was further emphasized that
Section l 8A which related to grant of exclusive or other privilege of F
manufacturing or supply by wholesale etc. enabled the State to grant such
privilege on the basis of annual rental by way of consideration for the grant
of such privilege and the rental could be collected to the exclusion of or in
addition to the duty or tax le~iable under Sections 17 and 18.
G
So viewed there can be no doubt that the levy of duty under Section
17 need not necessarily be. a duty of excise stricto sensu. In each case the
Court has to consider whether, having regard to the nature of levy, it is a duty
of excise or other impost.

H
134 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A We have earlier noticed that under Rule 11 of the Foreign Liquor
(Storage in Bond) Rules, 1961, foreign liquor stored in the bonded warehouse
can be removed only to the premises licensed under FL 9 licence held by a
''bonded warehouse licensee and such removal shall be,under cover of a pass
granted in that behalf and on payment of excise duty due. The same Rules
provide that any person desiring to store in bond foreign liquor shall make
B an application for licence in that behalf to the Commissioner of Excise
containing the particulars mentioned therein. It also obliges the applicant to
execute an agreement in Form A undertaking to abide by the provisions of
the Act, the Rules and orders made thereunder and the conditions of the.
Jice'nce and aiso agrees to pay the prescribed duty therefor. Rule 14 of the
C Rules provides for the issuance of a licence in Form BWI to KSBC for the
purpose of storage in bond and supply of foreign liquor in wholesale to FL9
licensee under the Foreign Liquor Rules, 1953. Rule 13(9) of the Foreign
Liquor Rules mandates that licence in Form FL9 shall be issued by the
Excise Commissioner only to KSBC possessing licence in Form BWl under
D the Foreign Liquor (Storage in Bond) Rules, 1961.
These Rules leave no manner of doubt that they create a complete
monopoly in favour of KSBC insofar as wholesale trade in IMFL is concerned.
The manufacturer m~st sell all their produce to KSBC which alone is e~titled
to the issuance of licence in Form FL9 and which is also issued a licence in
' '

E Form BWI. The Corporation has also executed an agreement in Form A
which,obliges it to pay duties payable on the liquor. In view of these Rules,
it was submitted that in effect the State ofKerala has parted with its privilege
of wholesale business in IMFL in favour of KSBC for a consideration. The
licence issued in favour of KSBC obliges it to pay the duty and it does so
F not on behalf of anyone else but in terms of its own licence.

Learned counsel for the parties have also drawn our attention to the
Notifications issued by the Government from time to time under Section 17
of the Act. The relevant portion of the Notificatiosn reads thus :-

G "SRO 60/61

The Government of Kerala hereby direct. that the duty under the said
Section shall be levied on the following kind of liquors manufactured
in the area where the said Act is in force or manufactured elsewhere
in India and imported into the said area by land or under bond by sea, ,,,·
H at the rates mentioned against each kind of liquor."
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 135

It was argued that the Notifications suggest that such duties are levied A.
either on goods manufactured in the area or imported into the area. It was
also submitted that an essential characteristic of 'duty of excise' is a uniformity
of incidence. It cannot vary from notification to notification.

From a perusal of Notification No. SOR 60/61 issued on 18th March,
1961 it appears that different rates of duties have been prescribed for different B
kinds of liquor. So far as Indian Made Foreign Spirits, except that consumed
by defence services personnel, the rate of duty prescribed was Rs. 12/- per
proof litre. For the Indian Made Foreign Spirits for defence services the rate
was Rs. 3 per proof litre. This was subsequently substituted by Notification
dated 23rd April, 1964 whereunder for the Indian Made Foreign Spirits when C
exported by distillers to Goa and not re-imported into the State, the rate of
duty was 45 np. per proof litre subject to the enumerated conditions being
satisfied. In other cases it was Rs. 14/- per proof litre. However, in the case
oflndian Made Foreign Spirits for defence services personnel supplied through
Canteen Stores Department etc. the duty is Rs.3/- per proof litre. Similarly
under J;lotification No. 330 of 1996 the rate of duty on Indian Made Foreign
Liquor when exported by distillers and not re-imported into the State was Rs.
51- per proof litre subject to the conditions being satisfied. In other cases the
rate of excise duty levied was an amount equivalent to I 00 % of its value.
It is, therefore,. apparent that under the same Notification purported to be ·
issued under Sections 6, 7, 17 and 18 of the Abkari Act duties were levied E
on liquors manufactured in the State or exported outside the State,_ or
manufactured elsewhere in India and imported into the State by land or sea
under bond. The duty levied on import of liquor would be impermissible
under'Entry 5 I of List II. Apparently, therefore, the duty is referable to Entry
8 of List II. It was rightly submitted that if the duty imposed was in the F
nature of excise duty on manufacture, different rates could not have been
prescribed depending upon whether it is sold in the market or consumed by
the defence services personnel.

It should also be noticed that having regard to the language of the
Notifications it cannot be said that duty is levied on manufacturer because G
(. Notifications suggest that such duty would be levied either on the goods
manufactured in the area or imported in the area. As earlier observed, the
duty levied ori import of liquor· is referable orily to Entry 8 of List II and not
Entry 51 thereof.

H
136 SUPREME COURT REPORTS [2005) SUPP. l S.C.R.

A We may also .notice that the stand of KSBC bef@re the High Court and
before. this. Court has ·been that supplies were effected to it by the
manufacturers/distillers in accordance with the relevant Rules without charging
excise duty when the_ supplies were effected. In accordance with the provisions
of the Abkari Act and Rule I I of the Foreign Liquor (Storage in Bond)
Rules, I961, goods ·purchased by the Corporation during the relevant period
were without payment of excise duty ·and the excise duty thereon was payable
at the time of removal of goods from the bonded warehouse to FL9 premises.
The Corporation .remitted turnover tax on the total value of turnover of the
Corporation for each' year at the rate of turnover tax prevalent during the
relevant year. The turnover of the Corporation was computed so as to include
C the value of the goods at which the supplies were received by the Corporation,
exeise' duty paid by the Corporation, profit margin of the Corporation and
sales tax paid by the Corporation. It is thus admitted by the Corporation that
under Rule I I of the (Storage in Bond) Rules the duty was payable when the
goods moved out from its bonded warehouse to FL9 premises. This also
D supports the submission of the respondents that the· duty was levied at the
stage of movement of the goods from the bonded warehouse of the Corporation
to the FL9 premises arid,' therefore; the levy of duty in terms of Rule I I must
. necessarily be traced to Section I 7(f) which levied duty on liquor "issued
from a distillery, brewery, winery or other manufactory or warehouse licensed
or established under Section I2 or Section 14". Even the parties understood
E that it was for the KSBC to pay the duty in terms of licence. Notifications
· have been issued under· Section I 7 and not specifically under any of the sub-
clauses thereof. It would, therefore, not be correct to contend that the duty
was levied on manufacture only.

F In this connection we may usefully refer to the decision of this Court
in State of Punjab and Anr. v. Mis. Devans Modern Brewaries Ltd and Anr.,
(supra); In that case the State of Kerala was also a party. The State had
imposed tax on import of potable liquor manufactured in other States. The
stand of the State was that it was within the province of the State to impose
restriction on import of potable liquor by imposing import duty. The aforesaid
G duty had not been imposed by the State in exercise of its statutory power
conferred upon it in terms of Entry 51 List II of the Seventh Schedule to the
Constitution but regulatory power as envisaged in Entry 8 thereof. The
contention raised on behalf of the respondents was that the requirements of·
Articles 30 I & 304 of the Constitution of India were to be complied with in
view of the iact that the duty of import must conform to the provisions of
·H
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 137

Entry 51 of List II. The submission of the respondents was rejected and those A
advanced on behalf of the State ofKerala were accepted. This Court observed
that the word 'fee' is not used in the strict sense to attract the doctrine of quid
pro quo. This was the price or consideration which the State Government had
· charged for parting with its privilege and granting the same to the vendors.
Therefore, the amount charged was neither a fee nor a tax but was in the B
nature of price of a privilege which the purchaser had to pay in any trading
and business in noxious article/goods. This Court held that the permissive
privilege to deal in liquor is not a 'right' at all. The levy charged for parting
with its privilege is neither a tax nor a fee. It is simply a levy for the act of
granting permission or for the exercise of power to part with that privilege.
This Court referred to numerous decisions of this Court which have clearly C
held that the State has a right to exercise all forms of control in relation to
all aspects regarding potable alcohol and the State Legislature has exclusive
competence to frame laws in that regard. The State has exclusive right in
relation to potable liquor and there was no fundamental right to do trade or
business in intoxicants. The State in its regulatory power has the right to D
prohibit absolutely every form or activity in relation to intoxicants - its
manufacture, storage, export, import , sale and possession and all these rights_
are vested in the State and indeed without such vesting there can be no
effective regulation of various forms of activities in relation to intoxicants. Jn
Devans Modern, case (supra) this Court held :-
E
"The Kerala State Beverages Corporation has licence only for
wholesale and retail and retail of liquor which will not authorize
them to import liquor and that the only licence issued to import
liquor into the State is the permit issued on payment of the import fee
and, therefore, it is seen that the levy of import fee is authorized by F
sections 6 and 24 of the Abkari Act, 1077. It is not excise duty or
countervailing duty referable to Entry 51 of List II. It is a collection
failing under Entry 8 of List II. It is the price paid to the State for
parting with its exclusive privilege of dealing in liquor which includes
every fact of it including its import. In my view, the State has the
f
right to prohibit every form of activity in relation to intoxicant G
--· including its import."

It, therefore, held that the levy was permissible and authorized under
Sections 6, 7, 17 and 18 of the Abkari Act. This decision supports the view
that the levy of so called excise duty under the Abkari Act may be referable
H
138 SUPREME COURT REPORTS (2005) SUPP. 1 S.C.R.

A to Entry 8 of List II and not Entry 5 r thereof.
In the passing we may observe that the majority decision has also
referred to the judgment of the Kerala High Court in the first batch of appeals
before us, and two passages from the impugned decision have been quoted
with approval in paragraph 335 of the report, which reads as under:-
B
"The manufacture and sale ofliquor ..are the exclusive privilege of the
State and the State, by the process of licensing, is parting with the
said privilege and what is charged by the State is on.ly the privilege
price through the process of licensing and it is not excise duty."
c "The concept of excise duty on production and manufacture as
understood in the Central Excise Act cannot be equated in the case
of excise duty under the Abkari Act since the manufacture and the
sale of liquor are the exclusive privilege of the State and the State,
by the process of licensing is parting with the said privilege and what
D is charged by the State is only the privilege price through the process
of licensing the price and it is not excise duty."

We have carefully perused the impugned judgment but we find that the
passages quoted therein were not the findings of the High Court but the
submissions advanced on behalf of the petitioners (respondents herein) which
E are to be found in paragraphs 15 and 44 of the impugned judg!Ilent. In fact
as we have noticed earlier in this judgment, the High Court in the first batch
of writ petitions proceeded on the basis that the duty levied was a duty of
excise but the liability did not fall on the manufacturers/distillers and· was
payable only by the KSBC after sale of the liquor by the manufac.turers.
F
So far as the judgment in. Mohan Breweries, (supra) is concerned it
may be noticed that the question which has been raised in this batch of
appeals was not raised therein, and the Court proceeded on the basis that the
levy was in the nature of duty of excise as is ordinarily understood. In
Madras Rubber Fact01y, case (supra) the charging section imposing the rubber
G cess was quite clear. Sub-section (I) provided for the levy and collection as
a cess a duty of excise on all rubber produced in India at such rate not
exceeding one anna per pound of rubber so produced as the Central
Government may, by the same or a like notification, from time to time fix.
Sub-section (2) provided that the said duty of excise shall be payable by the
H owner of the estate on which the rubber is produced, and shall be paid by him
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 139

to the Board within one month from the date on which he received a notice A
of payment therefore from the Board. In view of the clear language of the
charging section which saddled the owner of the estate on which the rubber
is produced with the liability to pay the said duty of excise, this Court held
that the liability to pay the said amount of cess got attached to the rubber so
produced _and, therefore, if the rules did not provide for the excise duty to be B
paid by the producer then who ever purchased the said rubber would be
purchasing goods to which the liability of payment of duty was attached. We
do not find such a provision in the Kerala Abkari Act.

From the above discussions the following conclusions emerge:-
c
l. Section 17 of the Kerala Abkari Act deals with imposition of
duty not necessarily connected with manufacture of liquor and,
therefore, the duty levied must in each case be examined before
coming to a conclusion as to whether it is in reality a duty of
excise.
D
2. The use of the words "duty of excise" in Section 17 of the Act
is not conclusive and it is for the Courts to examine in each case
as to whether it is in fact a "duty of excise".

3. In order that a duty may be characterized as "duty of excise" it
must be shown that it is a duty on manufacture of goods. If it is E
unrelated to the manufacture of goods, it may be any other impost
permitted by law, but would not qualify as a duty of excise.

4. Section I SA of the Act permits the State of Kerala to grant
exclusive or other privilege of manufacture etc. on payment of
rentals which includes the privilege of supplying liquor by F
wholesale or by retail. The annual rental payable under Section
I SA may be collected to the exclusion of or in addition to duty
or tax leviable under Sections· 17 and 18 of the Act.

5. That the State of Kera la by amendment of the Act and the relevant G
Rules created a monopoly in favour of the Kerala State Beverages
Corporation. Licences in Form FL9 and BWl have been given
exclusively to the aforesaid Corporation which has also executed
an agreement in Form A undertaking to pay the duty.A monopoly
has been created in favour of the aforesaid Corporation in the
H
140 SUPREME COURT REPORTS [2005] SUPP. 1 S.C.R.

A wholesale trade of IMFL. In view of Rule 11 of the (Storage in
Bond) Rules duty is payable on the movement of IMFL from the
bonded warehouse of the Beverages Corporation to the FL9
licensed premises. It is payable when IMFL is issued from the
bonded warehouse of the Corporation.

B 6. The levy of duty on IMFL issued from a bonded warehouse
licensed or established under Section 12 or Section 14 of the Act
is referable to the duty levied under Section l 7(f) of the Kerala
Abkari Act.

7. The Notifications issued by the Gov~rnment relate both to goods
c manufactured in the area or imported into the area .

8. The duty levied is on goods and not on manufacture.

Taking all these factors into account and having regard to the Scheme
of monopoly introduced by the State ofKerala in the year 1984 we must hold
D that the levy of duty is not a levy in the nature of 'duty of excise' but is the
privilege price payable by KSBC in consideration of the State parting with
its exclusive privilege of wholesale trade in IMFL in favour of the aforesaid
Corporation.

E It was alternatively submitted on behalf of the State that even if it is ,f'

held that what is levied is privilege price it will still form part of the sale
price of the liquor sold by the distillers to the' Beverages Corporation and
hence part of the taxable turnover for the purpose of levy of turnover tax.
The respondents on the other hand contend that by its very nature the privilege
price must be paid by the beneficiary and is not capable of being transferred
F to the manufacturers/distillers from whom the IMFL is purchased for wholesale
trade.

We are of the view that ifthe privilege price is a part of the consideration
payable by the Corporation to the manufacturers for supply of IMFL to the
G Corporation it will certainly be a component of the sale price of the liquor
sold by the manufacturers to the Beverages Corporation. If it is not so, then
the respondents are right in contending that having regard to its very nature,
privilege price is a price which the beneficiary, in whose favour the State
parts with its privilege, must pay. In this case since the State has parted with
its exclusive privilege of wholesale trade in IMFL an<l that right has been
H conferred exclusively on the Beverages Corporation, it is the Beverages
-
STA TE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [BP. SINGH, J.] 141

Corporation which must pay the privilege price in addition to the annual A
rental payable by it.

In view of our above finding, it is not necessary to consider the
alternative submission of Mr. Nariman that even if the levy is found to be a
duty of excise, its incidence did not fall on the manufacturer or the producer.
B
In view of our finding that the duty imposed is not,a duty of excise but
represents the privilege price charged by the Government from KSBC as a
consideration for parting with its exclusive privilege to sell liquor by,wholesale
in the State of Kerala, the respondents are not liable to include that duty paid
by the Beverages Corporation in their turnover. However, the position changed C
radically with effect from January 5, 1999. The High Court noticed this fact
in paragraph 67 of the judgment, namely - that with effect from January 5,
1999 in view of the amendment to Foreign Liquor Rules, the KSBC could
not purchase IMFL from the manufacturers/distillers without payment of
duty. In view of the amendment, the KSBC had to pay duty before it could
lift the stock of IMFL from the manufacturers' warehouse to its own licensed D
premises. Thus the KSBC paid to the manufacturers the duty payable in
respect of IMFL and consequently the amount of duty paid formed part of
the consideration for which the property in goods passed to the KSBC. We
have earlier noticed the amendments made to the Foreign Liquor Rules which
leave no room for doubt that with effect from January 5, 1999 the E
manufacturers/ distillers (respondents herein) were bound to include in their
turnover the am·ount paid to them by the KSBC by way of duty levied under
the Abkari Act together with the price of the liquor purchased from them.
The learned Judges noticed this fact but granted relief in broad terms as
prayed for by the respondents. In our view the High Court fell into an error
in doing so. It ought to have held that in any event with effect from January F
5, 1999 the respondents - manufacturers/distillers were bound to include in
their turnover the amount of duty paid to them by the KSBC since that
formed part of the consideration for sale of IMFL to the said Corporation.
We, therefore, hold that from January 5, 1999, the date with effect from
which the KSBC started paying duty to the manufacturers/distillers before G
lifting the stock of IMFL to its own licensed premises, the amount of duty
paid formed part of the consideration paid by the Corporation to the
manufacturers and consequently it formed part of the turnover of the
manufacturers.

H
142 SUPREME COURT REPORTS [2005) SUPP. I S.C:R.

A Mr. Ashok Desai, Senior Advocate appearing on behalf of some of the
respondents strenuou'sly urged before us that in view of the provisions of
Section 5(1) and Section 5(2C) of the Kerala General Sales Tax Act, there
was no liability on the manufacturer of liquor to pay turnover tax on the sale
of IMFL. We find no merit in this submission.

B The levy of tax under the Kerala General Sales Tax Act, 1963 is by
virJ:ue of Section 5. Section 5(1) deals with levy of Sales Tax, whilst Section
5(2C)(i) deals with turnover tax. The relevant portion of this Section reads
as follows :-

C "5. Levy of tax on sale or purchase of goods :- (l) Every dealer
(other than a casual trader or agent of a non-resident dealer) whose
total turnover for a year is not Jess than 'two Jakh rupees and every
casual trader or agent of a non-resident dealer, whatever be his total
turnover for the year, shall pay tax on his taxable turnover for that
year,-
D
(i) in the case of goods specified in the First or Second Schedule, at
the rates and only at the points specified against such goods in the
said Schedules."

"5(2C)(i) Notwithst~nding anything contained in this Act or the Rules
E made thereunder every dealer shall pay turnover tax on the turnover
of goods as specified hereunder, namely :-

(b) by any dealer in Foreign Liquor (Indian made) or Foreign Liquor
F (Foreign made} as specified in entries against serial numbers 53
and 54 of the First Schedule at the rate of five percent on the
turnover at all points."

Thus under Section 5(1)(i) tax is payable (a) on goods specified in the
G First and Second Schedule, (b) at the rates and (c) at the points specified
against such goods in the said Schedules. However, under Section 5(2C)
which is the charging Section "Notwithstanding anything contained in this
Act or the Rule_s" "every dealer shall pay turnover tax." Thus, no dealer is
exempted from paying turnover tax. The turnover tax is to be paid "as specified
hereunder", and not at rates and at points specified in the First Schedule. The
H ·rate is specified in (2C)(i)(b) at 5% on the turnover at all points. Thus under
STATE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] 143
Section 5(2C)(i) every dealer has to pay at the rate of 5% at all points. The A
opening part of Section 5(2C)(i)(b), i.e., the words "by any dealer in Foreign
Liquor (Indian made) or Foreign Liquor (Foreign made) as specified in entries
against serial numbers 53 and 54 of the First Schedule", do not detract from
this portion. Here also the tax is to be paid by "any dealer", "as specified in
. entries against serial numbers 53 and 54 of the First Schedule" go with the B
words "in Foreign Liquor (Indian made) or Foreign Liquor (Foreign made)".
It is the Foreign Liquor which is specified in entries 53 and 54. The words
"By any dealer" only go with "in Foreign Liquor (Indian made) or Foreign
Liquor (Foreign made)". In other words, it is the goods, which are specified
in entries 53 and 54 of the First Schedule. This becomes very clear if one
looks at the First Schedule. The First Schedule deals with "goods in respect C
of which a single point of tax is leviable under sub-section (1) or sub-section
(2) of Section 5". The four columns in the First Schedule set out (1) the
Serial Number, (2) Description of goods, (3) Point of levy and (4) Rate of
Tax - %. In the First Schedule there is no column for dealer. The reference
to a dealer is only in column (3) which will indicate the point of time at D
which a dealer will pay tax. If under the charging Section the point of time
is not to be as per the First Schedule, then one will not consider column (3)
at all. This is clear as the only items are "goods'', "point of levy" and "Rate
of Tax - %". With this in mind if one now look at Section 5(l)(i) it becomes
clear that thereunder the Sales Tax is payable on the "goods", "at the points"
and "at the rates" specified in the Schedules. Whilst considering point and E
rate at which levy is to be made under Section 5(1 )(i) the levy and rate will
be as per the First Schedule but under Section 5(2C)(i)(b) the levy is at all
points and at 5% of the turnover. It is only if one has to see at what point
and at what rate the levy is ·to be made that one will take columns (3) and
(4) of the First Schedule into consideration. As against this under Section F
5(2C)(i) the turnover tax is on "Foreign Liquor" specified in entries 53 and
54, i.e., in column (2) of entries 53 and 54. The turnover tax is at the fixed
rate of 5% on the turnover at all points. Thus, in Section 5(2C)(i) there is no
reference to columns (3) and (4) of the First Schedule. This is clear from the
fact that under Section 5(2C), which is the charging Section, turnover tax is
payable by "all dealers". The term "dealer" is defined in Section 2(viii) and G
admittedly covers the Respondents. If the interpretation sought to be placed
by the Respondents is accepted then there would be a conflict between Section
5(2C)(i) which prescribed rate of 5% on the turnover at all points and columns
(3) and (4) of the First Schedule under which tax is only at point of first sale
in the State and at rate of 75%. It must, therefore, follows that the words H
F
144 SUPREME COURT REPORTS [2005] SUPP. I S.C.R.

A "goods as specified" in Section 5(2C)(i), has reference only tc;> the description
of goods under Entry 53 of Schedule I, namely "Foreign Liquor (Indian
made)". In the case of inconsistency, Section 5(2C)(i) must prevail over the
Schedule in view of the non obstante clause.

If submission on behalf of the Respondents is accepted and it is h~ld
B that the words "as specified in entries against serial numbers 53 and 54 of the
First Schedule" go with the words "by any dealer", even then under column
(3) of Entries 53 and 54 of the First Schedule the relevant words are "by a
dealer who is liable to pay tax under Section 5". Admittedly, the Respondents
are dealers who.are liable to pay tax under Section 5. They only get exempt
C from paying tax under Section 5(l)(b) because the sales tax is to be paid "at
the rates" and "only at points specified against the g~ods in .the First Schedule".
Under column (3) of the First Schedule in entries S3 and 54 the points of levy
are (a) for the Kerala State Beverages Corporation the point of levy is at time
of sale, (b) by a dealer, who is liable to tax under Section 5, the levy is at
point of first sale. However, if the first sale is' to Kerala State Beverages
D · Corporation then at that point there is no levy under Section 5(1 )(b) because
. the charging Section provide that the levy is to be as per the Schedule.
Section 5(2C)(i) does not lay down that tax is to be paid at the point and at
the rate specified against the goods in the Schedule. Under Section 5(2C)(i)
the tax is at the rate of 5% on the turnover at all points.
E
Thus the Respondent would in any event be liable to pay turnover tax
on their turnover. Further, in the 1st judgment there is no discussion on this
aspect at all. In the 2nd judgment the decision is against the Respondents on
this aspect against which they have filed no Appeal. We entirely concur with
the view of the High Court in the second batch of writ petitions on this aspect
F of the matter.

The High Court, however, held that the amendment of Section 5(2C)
of the Kerala General Sales Tax Act by adding an explanation which was
brought into effect retrospectively from July 1, 1987, did not remove the
G constitutional invalidity in the statute because in view of the finding recorded
by the High Court that the manufacturers were not liable to pay excise duty,
an amendment to the Sales Tax Act could serve no purpose unless lacuna
was removed by appropriate amendment to the Abkari Act. We find ourselves
in complete agreement with the view of the High Court because if the Act
imposing the levy did not impose upon the manufacturers the liability to pay
H excise duty, by an amendment of the Sales Tax Act the same could not be
STA TE OF KERALA v. MAHARASHTRA DISTILLERIES LTD. [B.P. SINGH, J.] J45

included in their turnover. A
In the result Civil Appeal Nos.2249-2257 of 2000 are partly allowed
and it is declared that the respondents - manufacturers/ distillers are liable to
pay turnover tax. It is declared that the respondents - manufacturers are liable
to include in their turnover the amount of duty paid to them by KSBC and
included in the consideration for sale of IMFL to the aforesaid Corporation B
with effect from January 5, 1999 and pay the turnover tax accordingly.

Civil Appeal Nos. 95 of 2003; 102 of 2003 ; 622 of 2003 ; Appeal
arising out of SLP (c) No. 1032 of 2003 ; Civil Appeal Nos. 5099 of 2003
; 5100 of2003; 5101 of2003; 5102 of2003; 5103 of2003; 6515 of2003 C
; 6516 of 2003 ; 7952 of 2003 and 7954 of 2003 are dismissed.

No order as to costs.

D.G. Appeals disposed of.

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7
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