Holding

The licence fee under Rule 3(a) is not a fee but a tax, and the State lacks competence to levy it on denatured spirit.

Summary

The State of Uttar Pradesh imposed a licence fee of 15 paise per litre on specially denatured spirit (SDS) under Rule 3(a) of the 1978 Rules, which the respondents challenged as an illegal tax. The Supreme Court examined whether the fee was a genuine regulatory fee supported by a quid pro quo relationship with the cost of regulation, and whether the State had legislative competence to levy it on denatured spirit. Relying on the Constitution Bench decision in Synthetics and Chemicals Ltd., the Court held that the State cannot tax industrial alcohol and that denatured spirit, once rendered unfit for human consumption, falls outside the State's regulatory domain. The Court found no material showing any additional regulatory expense justifying the fee, concluding that the levy was a tax in disguise. Consequently, the appeals were dismissed and the licence fee was declared invalid.

Issues considered

The fee imposed under Rule 3(a) is a fee or a tax within the meaning of Article 265.
The State of Uttar Pradesh has legislative competence to levy a fee on specially denatured spirit.
Whether there is a sufficient quid pro quo correlation between the fee and the cost of regulation of denatured spirit.
Whether the possibility of re‑natured denatured spirit brings the activity within the State's regulatory power.
Whether the levy violates the constitutional division of powers under Articles 246 and 265.

Legislation cited

Industries (Development and Regulation) Act, 1951
U.P. Excise Act, 1910s. 3(11), s. 3(13), s. 3(9), s. 41

Subjects

licence feedenatured spiritindustrial alcoholtax vs feelegislative competenceU.P. Excise ActArticle 265regulatory feere‑natured spiritconstitutional law

Judgment

STATE OF U.P. AND ORS. A
v.
V AM ORGANIC CHEMICALS LTD. AND ORS.

OCTOBER 17, 2003

[RUMA PAL AND B.N. SRIKRISHNA, JJ.] B
U.P. licences for the Possession of Denatured Spirit and Specially
Denatured Spirit Rules, 1978: Rule 3(a).

Industrial alcohol-Specially Denatured Spirit (SDS)-Dcence fee- C
Levy of-High Court quashed notification imposing licence fee on SDS~
Correctness of-Held: Once industrial alcohol was denatured its conversion
into potable liquor became impossible-Hence, no licence fee /eviable on
such industrial alcohol-Moreover, no correlation existed between the fee
levied and the cost of additional regulatory measures-Such licence fee
only a tax in the garb of a fee-U.P. Excise Act, 1910. D
Constitution of India, 1950 :

Article 265-Tax and fee-Distinction between-Explained.

The respondents filed writ petitions in the High Court challenging E
a notification under Rule 3(a) of the U.P. Licences for the Possession
of Denatured Spirit and Specially Denatured Spirit Rules, 1978 whereby
a licence fee was sought to be imposed on the quantity of Specially
Denatured Spirit (SDS) i.e. denatured industrial alcohol obtained from
the distilleries of the respondents. High Court allowed the writ F
petitions. Hence the appeal.

On behalf of the appellant, it was contended that it had the power
to impose the fee in exercise of its regulatory powers since it was
necessary to see that the denatured spirit was not re-natured into G
potable alcohol; that unless the State took steps to prevent diversion
of denatured spirit, heavy loss would be caused to the exchequer of the
Government and that it would amount to a health hazard if lhe re-
natured spirit was consumed.

On behalf of the respondents, it was contended that the State H
957
958 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A legislature did not have the legislative competence to legislate on
denatured spirit; that the fee was in the nature of tax and that it was
excessive.

Dismissing the appeal, the Court
B
HELD : 1.1. The State Government is competent to levy fee for
the purpose of ensuring that industrial alcohol is not surreptitiously
converted into potable alcohol so that the State is deprived of revenue
on the sale of such potable alcohol and the public is protected from
consuming such illicit liquor. But this power stops with the denaturation
C of the industrial alcohol. Assuming that denatured spirit may by
whatever process be re-natured and then converted into potable liquor
this would not give the State the power to regulate it. [975-E-F-G)

Varn Organic Chemicals Ltd. v. State of UP., [1997) 2 SCC 715,
D relied on.

Bihar Distillery v. Union of India, [1997) 2 SCC 727; Deccan Sugar
& Abkari Co. Ltd. v. Commissioner of Excise, [1998) 3 SCC 272,
Synthetics and Chemicals Ltd. v. State ofUP., [1990) 1 SCC 109 and State
E of UP. v. Modi Distillery, [1995) 5 sec 753, referred to.

1.2~ The fee is required to be justified with reference to the cost
of regulation of denatured spirit. The industry is already paying a fee
under Rule 2 of the U.P. Licences for the Possession of Denatured
F Spirit and Specially Denatured Spirit Rules,·1978 for such regulation.
Indeed the justification for levying the fee under Rule 3(a) is the
identical justification given by the state for levying the fee under Rule
2. Presumably, a full complement of Excise Officers and staff are
appointed by the State in the Excise Department to carry out their
duties under the U.P. Excise Act, 1910 to oversee, control and keep
G duty oli the various kinds of intoxicants under the Act. It is assumed
that apart from the normal strength, additional officers and staff were
appointed to regulate the denaturation of the industrial alcohol. There
is nothing to show that there has been any deployment of any
additional staff to oversee the possibility of renaturation of the
H denatured spirit. [976-A-B-C-D)
STATE v. VAM ORGANIC CHEMICALS LTD. 959

2. The State has not produced any material to show that it was A
incurring any additional cost for any further regulation of denatured
spirit. In the absence of any such correlation the fee under Rule 3(a) is
not a fee at all levied for the purpose of additional regulation or for any
service rendered but is really a tax in the garb of a fee. [976-E-F, G-H]

Anil Kumar Neotia v. Union of India, [1998] 2 SCC 587, referred
B
to.

3. The word 'service' in the context of a fee could include a levy
for a compulsory measure undertaken vis-a-vis the payer in the interest
of the public. This 'coercive' measure has been subsequently judicially C
clarified to mean a 'regulatory measure'. But in the case of both kinds
of services whether compulsorily imposed or voluntarily accepted,
there would have to be a correlation between the levy imposed and the
"counter payment or quid pro quo". However, corelationship between
the levy and the services rendered is one of general character and not D
of mathematical exactitude. All that is necessary is that there should
be a reasonable 'relationship' between levy of the fee and the service
'rendered'. Contrariwise, when there is no such correlation, the levy,
despite its nomenclature is in fact a tax. [971-G-H; 972-A]

The Commissioner, Hindu Religious Endowments, Madras v. Sri E
Lakshmindra Thirtha Swamiar of Sri Shirur Mutt, [1954] SCR 1005,
followed.

ITC Ltd v. Agricultural Produce Market Committee, [2002] 9 SCC
232; Sreenivasa General Traders v. State ofA.P., [1983] 4 sec 353; The F
Corporation of Calcutta v. Liberty Cinema, AIR (1965) SC 1107; B.S.E.
Brokers forum v. Securities and Exchange Board of India, [2001] 3 SCC
482; Secunderabad Hyderabad Hotel Owners' Assn. v. Hyderabad
Municipal Corpn., [1992] 2 SCC 274; State o/Tripura v. Sudhir Ranjan
Nath, [1997] 3 sec 665; Shri Bi/eshwar Khand Udyog Khedut Sahakari G
Mandali Ltd v. State a/Gujarat, [1992] 2 SCC 42; Mis. Gujchem Distillers
India Ltd v. State of Gujarat, [1992] 2 SCC 42; India Mica Micanite
Industries v. State of Bihar, [1971] 2 SCC 236 and A.P. Paper Mills Ltd
v. Govt. of U.P., [2000] 8 SCC 167, referred to.

CIVIL APPELLATE JURISDICTION : Civil Appeal Nos. 5416· H
960 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A 5424 of 2000.

From the Judgment and Order dated 3.4.2000 of the Allahabad High
Court in C.M.W.P. Nos. 297/2000, 331/82, 625/93, 696/94, 537/95, 299/
96, 198/97, 221/98 and 428 of 1999.
B
WITH

C.A. Nos. ~425-5426, 5427-5435/2000 and 8382 of 2003.

C R.N. Trivedi, Mukul Rohatgi, Additional Solicitor Generals, Subodh
Markandya, Ashok Desai, D.A. Dave, Rakesh Dwivedi, P.P. Malhotra,
Ashok K. Srivastava, Rajeev Kumar Dubey, Kamlendra Misra, Ashok
Srivastava, Ms. D. Bharati Reddy, G. Venugopal, Ms. Manik Karanjawala,
Dhruv Agarwal, Ms. Nandini Gore, Vivek Sharma, Ms. Jasmine Damkewala,
R.N. Karanjawala, Ravindra Kumar, Abhisekh Chaudhary, C.V.S. Rao,
D B.K. Prasad, B.V. Bairam Das, Dhruv Mehta, Mohit Chaudhary, Ms.
Shalini Gupta, K.L. Mehta and Ajay K. Agrawal for the Appearing parties.

The Judgment of the Court was delivered by

E RUMA PAL, J. : Leave granted in the special leave petition.

A series of writ petitions were filed by the respondents in the
Allahabad High Court challenging a notification dated 13th January 1990
whereby licence fee of 15 paise per litre was sought to be imposed on the
F quantity of specially denatured spirit (SDS) obtained from distilleries in
Uttar Pradesh under Rule 3(a) of the U.P. Licences for the Possession of
Denatured Spirit and Specially Denatured Spirit Rules, 1976. All the writ
petitions were allowed by the High Court. The State has questioned the
correctness of the decision in these appeals.

G The basic facts in all these appeals are substantially similar. Therefore,
the facts in the case of Varn Organic Chemicals Ltd. and Anr. are taken
as illustrative for the purpose of our decision ..

The respondent - company manufactures organic chemicals such as
H Acetic Acid, Acetic Anhydride and vinyl .Acetate at its chemical plant. The
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 961

main raw material for manufacture of these organic chemicals is Ethyl A
alcohol (industrial grade) which in tum is produced from molasses. In
1982, the respondent set up its own distillery for producing the industrial
alcohol. The distillery is registered under the provisions of the Industries
(Development and Regu Iation) Act, 195 l. The entire production of
industrial alcohol at the respondents' distillery as well as industrial alcohol B
from outside sources is used at its chemical plant for producing the organic
chemicals mentioned eariier. The entire quantity of industrial alcohol is
"denatured" before it leaves the respondents distillery and carried in pipes
to the chemical plant. It is this denatured industrial alcohol which is
subjected to the disputed levy.
c
The levy of the disputed licence fee is legislatively traceable to the
UP Excise Act, 1910. This Act provides for the control of and levy of
excise duty on intoxicating liquor and on intoxicating drugs in the State
of Uttar Pradesh. The word "intoxicant" has been defined under Section
3(13) of the Act as meaning 'any liquor or intoxicating drug'. Liquor has D
in tum been defined in Section 3(11) as meaning 'intoxicating liquor and
includes spirits of wine, spirit wine, tari, pachwai, beer and all liquid
consisting of or containing alcohol, also any substance which the State
Government may by notification declare to be liquor for the purposes of ,'
this Act'.
E
Industrial alcohol with which we are now concerned is not liquor nor
is it potable as such. However, it may be utilised to produce a kind of liquor
if it is 'denatured' 'Denatured' according to the definition of the word in
section 3(9) of the Act means :
F
"rendered unfit for human consumption in such manner as may
be prescribed by the State Government by notification in this
behalf."

The denaturants and their specification and the manner of denaturation
have been prescribed by the State Government. Separate premises previously G
approved for the purpose by the Excise Commissioner are required to be
provided for the process of denaturation and for the storage of denaturing
agents and the vessels and receptacles used in the process. Denaturation
must take place in these premises only and issue and storage of denatured
spirit can only b.:: made from or in these premises. The premises are to be H
962 SUPREME COURT REPORTS [2003) SUPP. 4 S.C.R.
A secured by an excise lock, and denaturation is to take place under the direct
supervision of the officer-in-charge. (see para 784 of the U.P. Excise
Manual). After the denaturation the emerging product is to be further tested
in the manner specified by the Excise authorities. If the alcohol has not
been satisfactorily denatured it is to be destroyed (vide paragraph 785 ibid).
B .It is not in dispute that the respondent has followed all these regulatory
measures.

To ensure the denaturation of industrial alcohol, in exercise of the
powers under Section 41 of the 1910 Act, the Uttar Pradesh Licences for
the Possession of Denatured Spirit and Specially Denatured Spirit Rules,
C 1976 (hereafter referred to as 'the Rules') were made. Rule 2 initially only
provided for the three types of licences which are required for the
possession of denatured spirit including specially denatured spirit for
industrial purposes, namely, licences in fonn FL-39, FL-40 and FL-41. The
respondents herein are all holders of lilcences in Fonn FL-39 which is
D granted for the possession of denatured spirit for use in industries in which
the alcohol is destroyed or converted chemically in the process into any
other product and the product does .not contain alcohol such as Either,
Styrene, Butadiene, Acetone Polythene etc.

E The fee for licences in fonn FL-39 is imposable under Rule 3(a) .
which initially read :

"3(a) The fee for a licence in Fonn F.L. 39 shall be at a rate
prescribed for industry to industry by the Excise Commissioner
per litre, payable on the quantity of specially denatured spirit
F obtained from any distillery in Uttar Pradesh. The fee shall be
realised by the Excise Inspector Incharge of the Distillery from
the licensee before making issues of-thi specially denatured spirit
from the distillery and shall be deposited in the Treasury under
the Head "X-State Excise Miscellaneous Confiscation and
Miscellaneous (a) Contribution towards Establishment."
G
In 1979 by notification No. 951/Licence-3, dated 31st May, 1979
Rule 3(a) was amended and the fee for licence in fonn FL~39 was fixed
for the first time at a rate of 10 paise per litre of specially denatured spirit
(SDS). It was made clear that "the .fee shall Q.e realised by the Excise
H Inspector in charge of the distillery from the licensee before making issues
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 963

of the specially denatured spirit from the distillery and shall be deposited .(\.
in the Treasury under the head 039. State Excise-E-Commercial and
Denatured Spirit medicated wines-B-licence fees commercial spirits". The
rate of fee has been subsequently revised on 13th January 1990 to 15 paise
per litre.

During this period, on 25th October, 1989 a 7-Judge Bench decision
B
in Synthetics and Chemicals Ltd. v. State of UP., (1990] I SCC 109 :
(1989] Supp I SCR 623 held that the State was not legislatively competent
to levy taxes on industrial alcohol. The subject matter of challenge in
Synthetics was the imposition of various levies by the State legislatures on
industrial alcohol. In the lead case of Synthetics (WP 182/1980) a. particular C
challenge was made to a Notification issued by the Government of UP in
1979 in exercise of powers under S. 40, sub-section (1) read with sub
section (2)(d) of UP Excise Act amending the Rule for levying vend fee
on industrial alcohol.
D
Synthetics and Chemicals Ltd. also filed a second writ petition (WP
No. 2423 of 1980) in this Court challenging the imposition of licence fee
of IO paise per litre under Rule 3(a) by the notification dated 31st May,
1979 referred to earlier and asked for refund of the payments which the
State had been recovering from Synthetics and Chemicals Ltd. since 17th E
May, 1979 and which the company had been paying under protest. By
order dated 21st July, 1980 WP 2423/80 was tagged along with WP 182/
1980. The Order also said that if Synthetics and Chemicals succeeded in
W.P. No. 2423 of 1980 then the State would refund the amounts which
formed the subject matter of the writ petition. As already noted the
challenge of the industries to the State levy of tax on industrial alcohol ~f
succeeded before the Constitution Bench.

Synthetics & Chemicals Ltd. then filed an application in WP No. 2423
of 1980 in which it contended that the Constitution Bench had disposed
of both its writ petitions viz., WP 182/1980 and 2423/1980 by its judgment G
striking down the provisions of the Act and Rules which sought to levy
tax on industrial alcohol. As such a prayer was made inter alia for refund
of the amounts paid on account of licence fee levied under Rule 3(a)
together with interest at 9% p.a. By an order dated 6.5.91 the application
was allowed by this Court. However, since the Constitution Bench decision H
964 SUPREME COURT REP.ORTS [2003] SUPP. 4 S.C.R.
A was tQ operate prospectively it was directed that while Synthetic &
Chemicals Ltd. would not be entitled to any refund for the amounts already
paid to the State "there would be no liability prospectively from the date
of judgment arid the demand by the State of Uttar Pradesh would not be
levied thereafter". The State filed an application for modification and
B clarification of this Order on the ground that only the vend fee on industrial
alcohol had been struck down by the Constitution Bench and vend fee was
entirely different from the licence fee which was imposed on FL-39
licensees. The State's plea was that "the order dated 6.5.1991 is being
treated as a precedent and the levies of licence fees to regulate issue of
C alcohol for industrial purposes are being challenged in the High Court and
the stay order are being issued by the Hon'ble High Court of Allahabad
on the basis of the aforesaid order of 6.5.1991". While dismissing the
State's application on 25.4.1994, this Court said :

"Mr. D.V. Sehgal, learned senior advocate appearing for the
D respondent State, states that licence fee has been challenged by
various parties in the High Court. The State of Uttar Pradesh can
raise all the points available to it before the High Court".

Soon thereafter on 22.6.1999 the following circular was issued by the
E Excise Commissioner to all District Magistrates in the State :

"In compliance with the judgment dated 25.10.89 passed by the
Hon'ble Supreme Court in W.P. (C) No. 182/81, Synthetic &
Chemicals Ltd. v. State of UP. & Ors., the recovery of the vend
fees from license holders by the Industrial Units, FL-39, FL-40,
F FL-41 and FL-16 has been declared illegal with prospective effect.
In addition the Hon'ble High Court by its judgment dated 12.7.90
in WP No. 36/76, Synthetic & Chemicals Ltd. v. State of U.P. has
held diesel Oil and Alcohol Taxation (Amendment) Act, 1976 as
illegal. Therefore, in order to ensure the compliance of t~e above
G orders this coffice by its circular No. 395/408/9-89-90/ Varn dated
10.4.90 has invited the attention for the non recovery of purchase
tax FL-39, 40, 41 and FL-16 from the license holders.

In another order passed in W.P.(c) No. 242311980-Synthetic
H & Chemicals Ltd. v. State of V.P. & Ors. on the L.A. No. 1 of
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 965
the petitioners, the Hon'ble Supreme Court by its order dated A
6.5.91, the recovery of lic;ence fee from the Petitioner has been
declared illegal with prospective effect. Therefore, after the said
order licence fee cannot be recovered from Synthetic & Chenucals
Ltd. Bareilly.

The compliance of action in accordance with the above may
B
kindly be ensured".
(Emphasis added)

Consequently no licence fee is levied on Synthetics and Chemicals
Ltd. under Rule 3(a). These facts have been relied on by the respondent C
to urge that they too. cannot be asked to. p,ay any Jicence fee under Rule
3(a). But before considering their plea one further fact needs to be noted.

On 18th May 1990 a notification was issued by the State ofU.P. by
which Rule 2 was amended to provide for the taking out of a licence in D
form DS-1 which was to be issued by the Collector to all distilleries within
his district (holding licence in Form PD-l or PD-2) "for denaturation of
spirit for supply to persons in Form FL-16, FL-39, FL-40 and FL-41" A
licence fee in respect of a licence in Form DS-l was payable in advance
@ 7 paise per litre of spirit so denatured by the distillery.
E
The notification dated 18th May 1990 amending rule 2 was challenged
by distilleries, including the respondent, under Article 226 before the High
Court. The challenge was on the ground, that the State had no power to
legislate in respect of industrial alcohol or to levy tax in respect thereof
and that the levy not being based on quid pro quo was otherwise bad. The F
High Court dismissed the distillers' writ petitions. The appeals from the
decision of the High Court were also disallowed by this Court in Vam
Organic Chemicals Ltd and Another v. State of UP. and Others, [1997] •
2 SCC 715 (referred to hereafter as "Varn Organics - I'').

We now come to the present appeals which arise from Writ Petitions G
filed by the respondents in the High Court between 1982 to 2000
challenging the levy of denaturation fee under Rule 3(a) on the ground,
that the State legislature did not have the legislative competence to legislate
on denatured spirit and that the fee of 15 paise per litre was in the nature
of tax and in any event excessive. The State countered the challenge and H
966 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A submitted that it had the power to impose the fee in exercise of its
regulatory powers since it was necessary to see that the denatured spirit
was not re-natured into potable alcohol. It was also contended that unless
the State took steps to prevent diversion of denatured spirit, heavy loss
would be caused to the exchequer of the Government and it would amount
B to a health hazard if the re-natured spirit was consumed.

The High Court a1lowed the writ petitions. It held, - following
Synthetic 's case (supra), that Parliament alone can legislate in respect of
liquor which is unfit for human consumption, and that the State Government
can only charge regulatory fees for the purpose of payment of salary for
C the staff and to see that no non-potable alcohol is converted into potable
alcohol. However, it held that the burden of showing that there is a broad
co-relation between the fee charged and administrative expenses for
imposing regulatory fee is on the State Government. It was noted that the
respondents were already paying a fee under Rule 2 for denaturation of
D spirit. It was noted that the process ofre-naturation of denatured spirit was
involved and extremely difficult and that "it is not averred in the counter-
affidavit that any additional staff has been employed for seeing that
denatured spirit is not renatured. At any event, no co-relation at all (what
to say of broad co-relation) has been shown between the charge of 15 paise
E per litre and any additional expenses incurred by the department". The
additional fee sought to be levied was, in the High Courts opinion, really
a tax in the garb of a regulatory fee. This conclusion was arrived at after
considering the pleadings and in particular the lack of any averment in the
counter affidavit filed by the appellants justifying levy of the additional
F fees under Rule 3(a).

Impugning the High Court's decision, the appellants have contended
_ that it is possible to renature denatured spirit. They have referred to the
decision of Synthetics (supra) to contend that the possibility of re-
naturation has been recognised by this Court in that decision. Instances of
G the illicit sale of denatured spirit after renaturing for human consumption
have been cited. It is submitted that since the power to levy excise on
potable alcohol vests solely in the State, there must be a power to take steps
to ensure that the denatured spirit remains denatured. It is submitted that
in fact special services had been rendered by the State in return for the
H licence fee levied under Rule 3(a). It is also contended that even if there
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 967

were no quid pro quo, nevertheless a regulatory fee can be charged unless A
the fee was expropriatory or excessive in which case the burden of proof
would be on the assessee to show that the fee was excessive. According
to the appellants, the word 'industry' has been construed by the Constitution
Bench in ITC Ltd. v. Agricultural Produce Market Committee & Ors.,
[2002] 9 SCC 232 para 136 to mean only manufacture and production. B
Therefore, the State was legislatively competent under the provisions of
Entry 33 List III of the Seventh Schedule to the Constitution to regulate
the products of an industry which was declared to be controlled industry
under Entry 52 of List -1. Since there was no central legislation occupying
the field, the State law must be held to be valid.
c
The respondents have supported the decision of the High Court and
submitted that once industrial alcohol is denatured, it is permanently unfit
for human consumption. They have referred to the definition of denatured
spirit in IS :324/1959 which says "spirit with added denaturants to render
it effectively and permanently unfit for human consumption". A reference D
is also made to the "Encyclopedia of Chemical Processing and Design"
which defines denaturing as a permanent process. According to
the respondents this was also the stand of State - appellants in Varn
Organics-I It is submitted that the respondents were already denaturing
the entire quantity of industrial alcohol and paying fee under Rule 2 for E
·that purpose. That fee had been justified in Varn Organics-I as necessary
to meet the cost of ensuring denaturation of the industrial alcohol and there
was no scope for further regulation. It is also submitted that assuming that
the fee was regulatory, there was no material whatsoever produced by the
State-appellants to establish that the fee levied under Rule 3(a) was F
necessary to meet the cost of any extra or additional expenditure by the
State. According to the respondents, the clarificatory order ~ated _6.5.91
passed by this Court in WP No. 2423 of 1980 had been accepted and acted
on by the State as far as Synthetic & Chemicals Ltd. was concerned. It is
their contention that the decision in Synthetic & Chemical Ltd WP 2423/
1980 was a judgment in rem, the benefit of which should be available to G
all industries which were similarly situated as Synthetic & Chemicals Ltd.
With regard to the State's justification for the levy on industrial alcohol
or denatured spirit under Entry 33 of List III to the Seventh Schedule of
the Constitution, it is submitted that the same argument had been expressly
negatived by the Constitution Bench in Synthetic 's Case. H

...
968 SUPREME COURT REPORTS (2003] SUPP. 4 S.C.R.
A Article 246 gives to the Parliament exclusive power to make laws
with respect to the matters enumerated in List I in the Seventh Schedule.
Entry 84 of List I and Entry 51 of List II were construed by this Court in
Synthetic 's case to hold that Parliament alone has the exclusive 'power to
legislate and levy excise tax in respect of industrial alcohol. It is unnecessary
B to refer to the law with regard to the comparative competence of the Union
and the States with regard to levy of excise, regulation and control of
industrial alcohol prior to the decision of the Constitution Bench in
Synthetics. Whatever the law was earlier, the decision in Synthetics now
holds the field. In that decision the State's power.to levy excise duty was
held to be limited by Entry 51 to tax on alcoholic liquors for human
C consumption. It was also held that Section 2 of the Industries (Development
and Regulation) Act, 195 l as well as Serial No. 26 of the First Schedule
to that Act covered the whole field on industrial alcohol and its products.
Therefore since the coming into force of the IDR Act on 8th May 1952
the State Legislatures are constitutionally incompetent to levy any tax on
,,. D industrial alcohol.

The principle was succinctly reiterated in State of UP. v. Modi
Distillery, [1995] 5 SCC 753 where it was said that the State's power to
levy excise duty was limited to alcohol of liquor for human consumption
E and "that the framers of the Constitution, when they used the expression
'alcohol liquors for human consumption', meant, and the expression still
means, that liquor which, as it is, is consumable in the sense that it is
capable of being taken by human beings as such as a beverage or
drink" ........... "Dictionaries and technical books showed that rectified spirit
F (95 per cent) was an industrial alcohol and not potable as such ..." Therefore
even if ethyl alcohol (95 per cent) could be used as a raw material or input,
after processing and substantial dilution, in the production of whisky gin,
country liquor, etc. nevertheless it was not 'iiltoxicating liquor' which
expression meant only that liquor which was consumable by human beings
as it was". Thus the State cannot legislate on industrial alcohol despite the
G fact that such industrial alcohol has the potential to be used to manufacture
alcoholic liquor.

A somewhat contrary view was taken by a Bench of two Judges of
this Court in Bihar Distillery v. Union of India, [ 1"997] 2 SCC 727. It was
H held that the decision in Synthetics did not deal with rectified spirit whiCh
STATE v. VAM ORGANIC CHEMICALS LTD. [PAL, J.) 969
could be converted into potable alcohol and was merely concerned with A
industrial alcohol which could not be so converted i.e.denatured rectified
spirit. A distinction was drawn betwern industries engaged in manufacturing
rectified spirit meant exclusively for j>upply to industries (industries other
than those engaged in obtaining c ~ manufacturing of potable liquor), •
whether after denaturing it or without denaturing it and industries engaged B
in manufacturing rectified spirit exclusively for the purpose of obtaining
or manufacturing potable liquor. In the first case, the industry was to be
under "the total and exclusive control of the industries and be governed
by the IDR Act and the rules and regulations made thereunder". As far as
the second case is concerned, "they shall be under the total and exclusive C
control of the State in all respects and at all stages including the
establishment of the distillery".

The decision in Bihar Distillery was doubted in Deccan Sugar &
Abkari Co. Ltd. v. Commissioner ofExcise, A.P., [1998] 3 SCC 272. It was
said that the decision in Bihar Distillery's ran counter to the scheme of D
legislative competence as examined by the Constitution Bench of this
Court as well as in the three-Judges Bench decision of this Court in Modi
Distillery". The appeals were accordingly referred to a larger Bench for
re-consideration of the judgment in Bihar Distillery's case.

The larger Bench followed Synthetics and Modi Distillery without E
expressly overruling the decision in Bihar Distillery1• We therefore proceed
on the basis that the decision in Synthetics continues to exclude the State
from levying tax on industrial alcohol whether or not it has the potential
to be used as alcoholic liquor.
F
However Synthetics has also said " ... the States have the power to
regulate the use of alcohol and that ower must include power to make
provisions to prevent and/or check industrial alcohol being used as
intoxicating or drinkable alcohol".

In summing up the law the Constitution Bench said : G
"The position with regard to the control of alcohol industry
has undergone material and significant change after the
I. Deccan Sugar & Abkari Co. ltd. v. Commissioner of Excise, A.P.C.A. No. 4355 of.
1985 unreported decision dated 13th February, 2002 H
970 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A amendment of 1956 to the IDR Act. After the amendment, the
State is left with only the following powers to legislate in respect
of alcohol :

(a) It may pass any legislation in the nature of prohibition of
potable liquor referable to Entry 6 of List II and regulating
B powers.

(b) It may lay down regulations to ensure that non-potable
alcohol is not diverted and misused as a substitute for
potable alcohol.
c
(c) The State may charge excise duty on potable alcohol and
sales tax under Entry 52 of List II. However, sales tax cannot
be charged on industrial alcohol in the present case, because
under the Ethyl Alcohol (Price Control) Orders, sales tax
D cannot be charged by the State on industrial alcohol.

(d) However, in case State is rendering any service, as distinct
from its claim of so-called grant of privilege, it may charge
fees based on· quid pro quo. See in this connection, the
observations o,f .Indian Mica case [1971] 2 SCC 236.
E·
The State's power is thus limited to (i) the regulation of non potable
alcohol for the limited purpose of preventing its use as alcoholic liquor and
..
(ii) the charging of fees based on quid pro quo. The question then is - is
the levy under Rule 3(a) of the 1976 rules justifiable as such fee?
F The locus classicus on the distinction between a 'fee' and a 'tax' is
the decision of this Court in The Commissioner, Hindu Religious .
Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur
Mutt, [1954} SCR 1005. In that case the subject matter of challc!lge was,
inter-alia, Section 76 of the Madras Hindu Religious and Charitable
G Endowments Act, 1951 under which religious institutions were required
to make a contribution at 5 per cent of their income towards the services -·
rendered by the Government and its officers. According to the State this
annual contribution was a fee for overseeing the working of the religious
institutions. According to the religious institutions; the levy was a tax
H which the State was incompetent to impose.
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 971

The distinctive characteristics of a tax and fee were laid down. As A
far as a fee is concerned it was held that:

a fee is generally defined to be a charge for a special service
rendered to individuals by some governmental agency. The
amount of fee levied is supposed to be based on the expenses B
incurred by the Government in rendering the service, though in
many cases the costs are arbitrarily assessed. Ordinarily, the fees
are uniform and no account is taken of the varying abilities of
different recipients to pay. These are undoubtedly some of the
general characteristics, but as there may be various kinds of fees,
it is not possible to formulate a definition that would be applicable C
to all cases".

However, the Court made it clear that the service need not necessarily
be one which is voluntarily taken by the person responsible for paying the
fee. There may be an element of compulsion or coerciveness present "if D
in the larger interest of the public, a State considers it desirable that some
special service should be done for certain people, the people must accept
these services, whether willing or not".

This Court struck down Section 76 on the ground that the annual E
contribution was a tax as there was

"total absence of any co-relation between the expenses incurred
by the Government and the amount raised by contribution under
the provision of section 76 and in these circumstances the theory F
of a return or counter payment or quid pro quo cannot have any
possible application to this case."

The word "service" in the context of a fee could, therefore, include
therefore a levy for a compulsory measure undertaken vis-a-viz the payer
in the interest of the public. This 'coercive' measure has been subsequently G
judicially clarified to mean a 'regulatory measure'. But in the case of both
kinds of services whether compulsorily imposed or voluntarily accepted,
there would have to be a correlation between the levy imposed and
the"counter payment or quid pro quo" However, correlationship between
the levy and the services rendered is one of general character and not of H
972 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.
A mathematical exactitude. All that is necessary is that there should be a
reasonable 'relationship' between levy of the fee and the service rendered" 2 •
Contrariwise when there is no such correlation, the levy, despite its
nomenclature is in fact a tax. In The Corporation of Calcutta v. Liberty
Cinema, AIR (1965) SC 1107. The licence fee charged under Section 548
B of the Calcutta Municipal Act 19 51 had been challenged on the ground that
no service was rendered commensurate with the tax. This Court said that
the levy was a tax which the State was competent to impose.

"the Act does not provide for any services of special kind being
rendered resulting in benefits to the person on whom it is imposed.
c The work of inspection done by the Corporation which is only to
see that the terms of the licence are observed by the licencee is
not a service to him. No question here arises of correlating the
amount of the levy to the costs of any service. The levy is a tax.
It is not disputed, .it may be stated that if the levy is .not a fee, it
D must be a tax". (Para 20) ..:

This test of correlationship or "correspondence" has been repeatedly
used by this Court either to uphold the fee holding that it was reasonable
for the requirement of the authority for fulfilling its statutory obligations
(B.S.E. Brokers Forum v. Securities and Exchange Board ofIndia, [2001]
E
3 SCC 482, p. 505); Secunderabad Hyderabad Hotel Owners' Assn. v.
·•
Hyderabad Municipal Corpn., [1992] 2 SCC 274, 286; State of Tripura
v. Sudhir Ranjan Nath, (1997] 3 SCC 665; Shri Bileshwar Khand Udyog
Khedut Sahakari Mandali Ltd. v. State of Gujarat, [1992] 2 SCC 42;
Mis. Gujchem Distillers India Ltd. v. State of Gujarat, [l.992] 2 SCC 399
F or to strike it down on the ground that the fee charge was not establilshed
to be so commensurate. (See: Indian Mica Micanite Industries v. State of
Bihar, [1971] 2 SCC 236, 243; A.P. Paper Mills Ltd. v. Govt.of U.P.,
[20001 8 sec 167.

G The respondents correctly objected to the States' contention that the
levy of tax on industrial alcohol and its products is competent under Entry
33 of List III. The issue was not raised before the High Court and was raised
before us only in reply. The arguments had been specifically raised before
the Constitutional Bench in Synthetics and expressly negatived where the
H 2. Sreenivasa General Traders v. State of A.P., [1983] 4 SCC 353
STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 973

State's contention was that the levy was stipulated "jointly or severally both A
under entries 8 of List II, Entry 51 of List II, Entry 33 of List III and what
is described as police powers regulatory and other incidental charges
according to them". (para 46).

In rejecting the submission the Constitution Bench said : "Under the B
constitutional scheme of division of powers under legislative lists, there are
separate entries pertaining to taxation and other laws. A tax cannot be
levied under a general entry". It was also held that the power to tax is
neither incidental nor subsidiary to the power to legislate on a matter or
topic. Since there was no such specific entry allowing the State to tax C
industrial alcohol it could not derive the power from any other entry. It
was said that the state cannot also claim that, it can regulate industrial
alcohol and a product of the scheduled industry, under Entry 33 of List
III because the Union, under Section 1SG or the IDR Act, has evinced clear
intention to occupy the whole field. Given this clear enunciation of the law,
the submission of the State must be rejected. D
Both the sides have relied heavily on the decision of this Court in Varn
Organic Chemicals Ltd. and Another v. The State of Uttar Pradesh and
Others, [1996] 2 SCC 715. Since the decision has basically and briefly
affirmed the reasoning of the High Court, we take up the High Court's E
decision for consideration before determining what this Court has in fact
held. The subject matter of challenge in Varn Organic-I was the notification
amending Rule 2 of the Rules by which licence fee@ 7 paise per litre was
sought to be imposed w.e.f. 2nd June 1990. It was contended that the State
Legislature had no power to impose the fee as the industrial alcohol which p,,

was produced by the petitioner was not fit for human consumption. In IL'
answer to the challenge, the State's contention as recorded by the High
Court was as follows :

"According to the respondents, this process of denaturing, to
render the rectified spirit unfit for human consumption, has been G
in vogue since 1863. The have also set out the process by which,
and the chemicals by mixing which, the rectified spirit is converted
into denatured spirit or especially denatured spirit, as in the case
may be. According to the respondents, however, the denaturing
is necessary to preclude the mis-use of rectified spirit for drinking H
974 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A purposes. They go further and say that even after denaturing, it
is necessary to ensure that denatured spirit is not re-natured to
render it fit for human consumption. It is towards this regulation
and service, the respondents say, that they are charging the
impugned fee."
B
The High Court said that the State was competent to frame regulations
under Entry 6 as well as Entry 8 of List II of the Seventh Schedule of the
Constitution to ensure that "ethyl alcohol/rectified spirit, which is proposed
to be used for industrial purposes, should be denatured first so that is cannot
thereafter be used for obtaining country liquor or for manufacturing
C IMFLs. The State, thus, draws a dividing line. Jt says that all cthylic
alcohol/rectified spirit, which is proposed to be used for industrial purposes,
should be denatured first. Once denatured, it cannot be used except for
industrial purposes. Once denatured, it goes out of the seisin of the State
Legislature. But, the State over-sees the process of denaturing so that
D quantity offectified spirit is no longer available for obtaining or producing
potable liquors. Rule 2 provides for such regulation and also charges, what.
it calls, a licence fee thereof'.

In this background, the High Court held that :
E
"The subject and purpose underlying the impugned impugned
rule is to ensure that rei::tified spirit sought to be used for
industrial purpose is used only for that purpose and is not
diverted or misused for obtaining country liquor or for
manufacturing other IMFLs .................................................. .
F This is a regulation made in the interest of public health
(Entry 6 of List II). It is also a law with respect to possession
and sale of intoxicating liquors-Entry 8 of .List IL

The High Court was also of the view that Section 18-G of the IDR
G Act did not operate on different fields. The reasoning of the High Court
in Vam Organics I has been adopted by the same learned Judge and Bihar
Distillery's case. We have already noted that the reading in construction
and consequent limitation of Synthetics in Bihar Distillery has been
disapproved and can safely be said. not to represent the law. However, Vam
H Organics I also had held that the State was competent to regulate industrial
•
';,

STATE v. YAM ORGANIC CHEMICALS LTD. [PAL, J.] 9'J5

alcohol so that it was not converted into potable liquor, the High Court also A
found that the State was competent to levy a fee for the purpose. It was
held that the fee could be levied not only for services rendered but also
towards the cost of fegulation. In the first case, the element of quid pro
quo is necessary but in the second case, the fee must be reasonable. Tqe
High Court then said : B
"The question then arises, how to judge the reasonableness of suqh
a fee. In our opinion, it would be appropriate, in such a case, t.o
look to the expenditure which the State undergoes for administering
the regulation, and if we find that there is a broad co-relation C
between the expenditure and the fees charged, we should sustaip
the same".

The Court noticed the facts stated in the counter affidavits particularly
setting up of a Headquarters laboratory and deployment of a good number
of officers and employees who were engaged in manning the laboratory D
besides the staff which is posted at the distilleries. There was, according
to the High Court, a broad co-relationship between the amount of fee
charged and the expenses incurred for implementing and over seeing the
regulation. The challenge to the levy of licence fee under Rule 2 was
accordingly dismissed. As we have noted the appeal of Vam Organic wa$ E
dismissed by this Court affirming this reasoning of the High Court because
it found no reason to differ with it.

Considering the various authorities cited, we are of the view that the
State Government is competent to levy fee for the purpose of ensuring that'
industrial alcohol is not surreptitiously converted into potable alcohol so F
that the State is deprived of revenue on the sale of such potable alcohol
and the public is protected from consuming such illicit liquor. But this.
power stops with the denaturation of the industrial alcohol. Denatured spirit'
has been held in Vam Organics I, to be outside the seisin of the State
Legislature. Assuming that denatured spirit may by whatever process be . G
renatured. (a proposition which is seriously disputed by the respondents)
and then converted into potable liquor this would not give the State the ·
power to regulate it. Even according to the demarcation of the filed of
legislative competence as envisaged in Bihar Distillery industrial alcohol
for industrial purposes falls within the exclusive control of the Union and H
976 SUPREME COURT REPORTS [2003] SUPP. 4 S.C.R.

A according to Bihar Distillery "denatured spirit, of course, is wholly and
exclusively industrial alcohol".

Besides, the fee is required to be justified with reference to the cost
of such regulation. The industry is already paying a fee under Rule 2 for
B such regulation. Indeed the justification for levying the fee under Rule 3(a)
is the identical justification given by the State for levying the fee under
Rule 2. Presumably, a full complement of Excise Officers and staff are
appointed ·by the State in the Excise Department to carry out their
duties under the Act to oversee, control and keep duty on the various
kinds of intoxicants under the Act. Having regard to the decision in
C Vam Organics I, we must also assume that apart from the normal strength,
additional officers and staff were appointed to regulate the denaturation of
the industrial alcohol. There is nothing to show that there has been any
deployment of any additional staff to over-see the possibility of renaturation
of the denatured spirit.
D ......
The question is (to borrow the language is Synthetics) whether in the
garb of regulations a legislation which is in pith and substance, as we look
upon the instant legislation, a fee or levy which has no connection with
the cost or expenses administering the regulation, can be imposed purely
E as a regulatory measure. Judged by the pith and substance of the impugned
legislation, we are definitely of the opinion that these levies cannot be
treated as part of regulatory measures." The State has not produced any
material to show that it was incurring any additional cost for any further
regulation of denatured spirit. Any trace of a lingering doubt as to the
propriety of the levy under Rule 3(a) must be taken to have been noted
F off effectively with the order passed by three Judges of this Court in the
Writ Petition filed by Synthetics challenging the same- levy as we have
noted earlier. That order has resulted in granting Synthetics & Chemicals
Ltd. relief from payment under Rule 3(a). The only distinction between the
present respondents' cases and Synthetics was that the respondents chose
G to challenge the levy before the High Court. That could be no rational basis
for denying the respondents who are otherwise identically situated,. the
same relief. (See : Anil Kumar Neotia v. Union of India, {1998] 2 SCC
587). In the absence of any such correlation the fee under Rule 3 is not
a fee at all levied for the purpose of additional regulation or for any service
H rendered but is really a tax in the garb of a fee.
STATE,._ YAM ORGANIC CHEMICALS LTD. [PAL, J.) 977

The appeals must therefore be and are hereby dismissed. It appears A
· from the records that since 1982 the High Court had passed interim orders
in the series of writ petitions filed by the respondents challenging the
validity of the imposition of the licence fee, staying the impugned levy.
Separate writ petitions were filed in respect of the assessment years and
interim orders obtained in respect of each year. For the excise year 1994- B
95 initially an order was passed staying the levy of the impugned licence
fee subject to the respondents furnishing adequate security. This order was
clarified on 2.9.1984 by allowing the respondents to furnish bank guarantee
in respect of the licence fee for the excise year ir. question subject to which
the levy was stayed. For the subsequent years the same interim order was C
passed. The respondent had therefore made no payment to the appellant
of the licence fee but had furnished several bank guarantees which were
kept renewed until the disposal of all the writ petitions by the High Court.
After allowing the writ petition the High Court directed the discharge of
the bank guarantees. Although this order was stayed when the appeal was
admitted by this Court on 25.9.2000, there has been no collection of the D
disputed levy by the appellants. There is as such no question of any refund
being directed of any amount by the appellant to the respondents. Where
the levy itself has been held to be invalid, the State-appellant cannot be
permitted to realize the amount recovered by the bank guarantees (See :
Somaiya Organics V. State of UP., [2001) 5 sec 519 para 35). We E ,•
therefore dismiss these appeals with costs and direct that the bank
guarantees furnished by the respondents will stand discharged.

v.s.s. Appeals dismissed.