State of U.P. & Ors. v. M/s Lalta Prasad Vaish and sons

Judgment / Order of the Supreme Court

Judgment

Dr Dhananjaya Y Chandrachud, CJI

Table of Contents*

A. Background ............................................................................. 5 i. Relevant constitutional provisions ................................ 5 ii. The judgment in Synthetics (7J) .................................... 8 iii. The aftermath of Synthetics (7J) .................................... 16 iv. The Reference Order(s) ................................................... 22 B. Submissions ............................................................................ 26 i. Appellants’ submissions ................................................. 26 ii. Respondent’s submissions ............................................. 35 C. The distinction between potable and non-potable alcohol ..................................................................................... 42 D. Issues ...................................................................................... 45 E. Analysis .................................................................................... 45 i. The constitutional distribution of legislative power .... 45 ii. Scheme of legislative entries ......................................... 48 iii. The field covered by Entry 52 of List I and Entry 8 of List II .................................................................................. 51 a. The scope of Entry 8 ................................................ 52 I. The meaning of ‘that is to say’ ........................ 52 II. Product or industry based entry ....................... 55 b. Scope of Entry 52 of List I: the absence of “to the extent to which” ......................................................... 57 c. Reconciling the potential overlap between Entry 52 of List I and Entry 8 of List II ..................................... 63 iv. Scope of Entry 8: Meaning of ‘intoxicating liquor’ ...... 70 a. Precedent on the interpretation of ‘intoxicating liquor ’: exploring FN Balsara and Southern Pharmaceuticals ...................................................... 71

* Ed. Note: Pagination as per the original Judgment.

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b. The legal import of ‘intoxicating liquor’ ..................... 79 c. Evolution of the legislative lists on ‘intoxicating liquor’ ......................................................................... 85 d. The harmonious interpretation .................................. 96 v. The correctness of the decision in Synthetics (7J) ..................................................................................... 102 vi. The impact of the decision on Item 26 of the First Schedule of IDRA ............................................................. 113 vii. The (ir)relevance of the decision in Tika Ramji to the dispute .............................................................................. 115 viii. Section 18G of IDRA and Entry 33 of List III ................ 119 F. Conclusion .............................................................................. 120

A. Background

1Copy pinpoint1. “Intoxicating liquor” falls within the legislative domain of the State Legislatures under Entry 8 of the State list, List II, of the Seventh Schedule to the Constitution. The issues which arise for adjudication in this reference pertain to the scope of the power of the State Legislatures under Entry 8 and the meaning of the phrase “intoxicating liquor”. The question is whether “intoxicating liquor” in Entry 8 only includes potable alcohol, such as alcoholic beverages or also includes alcohol which is used in the production of other products. In Synthetics and Chemicals Ltd. v. State of UP,1 (“Synthetics [7J]), a seven-Judge Bench delineated the scope of the regulatory powers of State Legislatures on “intoxicating liquor”. The correctness of Synthetics [7J] (supra) has been referred to a larger bench. We answer the reference in this judgment.

i. Constitutional provisions

2Copy pinpoint2. The State has the legislative competence under Entry 24 of List II over ‘industries’ but this is subject to entries 7 and 52 of List I.2 Under Entry 52 of List I, Parliament has legislative competence over such industries, the control of which by the Union is declared by

1 [1989] Supp. 1 SCR 623 : (1990) 1 SCC 109 2 “24. Industries subject to the provisions of Entries 7 and 52 of List I”

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Parliament by law to be expedient in the public interest.3 Entry 7 of List I deals with industries which are declared by Parliament by law to be necessary for the purpose of defence or for the prosecution of war.4 Under Entry 33 of List III, the State Legislatures and Parliament can legislate on trade and commerce in, and the production, supply and distribution of the products of industries controlled by Parliament under Entry 52 of List I.5 Entry 8 of List II deals with ‘intoxicating liquors’.6 These words are followed by the expression “that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors”. The Seventh Schedule also demarcates taxing powers related to alcohol separately. Entry 84 of List I (before it was amended by the Constitution (One Hundred and First Amendment) Act 2016) enabled Parliament to levy duties of excise on tobacco and other goods manufactured or produced in India except alcoholic liquors for human consumption but including medicinal and toilet preparations containing alcohol.7 Entry 51 of List II confers the State Legislature the competence to levy duties of excise, inter alia, on alcoholic liquors for human consumption but not including medicinal and toilet preparations containing alcohol.8

3 “52. Industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest.” 4 “7. Industries declared by Parliament by law to be necessary for the purpose of defence or for the prosecution of war.” 5 “33. Trade and commerce in, and the production, supply and distribution of – (a) The products of any industry where the control of such industry by the Union is declared by Parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; (b) Foodstuffs, including edible oilseeds and oils; (c) Cattle fodder, including oilcakes and other concentrates; (d) Raw cotton, whether grinned or ungrinned, and cotton seed; and (e) Raw jute.” 6 “8. Intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors” 7 “84. Duties of excise on tobacco and other goods manufactured or produced in India except- (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics, But including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry. But including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.” 8 “51. Duties of excise on the following goods manufactured or produced in the State and counterveiling duties at the same or lower rates on similar goods manufactured or produced elsewhere in India:- (a) Alcoholic liquors for human consumption; (b) Opium, Indian hemp and other narcotic drugs and narcotics, But not including medicinal and toilet preparations containing alcohol or any substance included in sub-paragraph (b) of this entry.

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3Copy pinpoint3. In exercise of the power under Article 2469 read with Entry 52 of List I, Parliament enacted the Industries (Development and Regulation) Act 1951.10 Section 2 of IDRA stipulates that it is expedient in public interest that the Union should take control of the industries specified in the First Schedule to the enactment. Item 26 of the First Schedule read as follows: “26. Fermentation industries: (1) Alcohol (2) Other products of fermentation industries”

4Copy pinpoint4. In 2016, Item 26 of the First Schedule to the IDRA was amended to exclude potable alcohol from the ambit of the Item.11 Item 26 reads as follows after the amendment: “26. Fermentation industries (other than potable alcohol): (1) Alcohol (2) Other products of fermentation industries”

5Copy pinpoint5. Section 18-G of IDRA12 grants the Central Government the power to regulate the supply and distribution “of any article or class of articles relatable to a scheduled industry” for securing equitable distribution and availability at fair prices.

9 “246. Subject matter of laws made by Parliament and by the Legislatures of States.” 10 “IDRA” 11 The Industries (Development and Regulation) Amendment Act 2016 12 “18G. Power to control supply, distribution, price, etc., of certain articles.— (1) The Central Government, so far as it appears to it to be necessary or expedient for securing the equitable distribution and availability at fair prices of any article or class of articles relatable to any scheduled industry, may, notwithstanding anything contained in any other provision of this Act, by notified order, provide for regulating the supply and distribution thereof and trade and commerce therein. (2) Without prejudice to the generality of the powers conferred by sub-section (1), a notified order made thereunder may provide— (a) for controlling the prices at which any such article or class thereof may be bought or sold; (b) for regulating by licences, permits or otherwise the distribution, transport, disposal, acquisition, possession, use or consumption of any such article or class thereof; (c) for prohibiting the withholding from sale of any such article or class thereof ordinarily kept for sale; (d) for requiring any person manufacturing, producing or holding in stock such article or class thereof to sell the whole or the part of the articles so manufactured or produced during a specified period or to sell the whole or a part of the article so held in stock to such person or class of persons and in such circumstances as may be specified in the order; (e) for regulating or prohibiting any class of commercial or financial transactions relating to such article or class thereof which in the opinion of the authority making the order are, or if unregulated are likely to be, detrimental to public interest;

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ii. The judgment in Synthetics (7J)

6Copy pinpoint6. The United Provinces Excise Act 191013 was enacted to “consolidate and amend the law in force in the United Provinces relating to the import, export, transport, manufacture, sale and possession of intoxicating liquor and of intoxicating drugs”. In exercise of the powers under the UP Excise Act, the Government of the United Provinces levied vend fee14 on ‘denatured spirit’ from the wholesale dealer of denatured spirit. The UP Excise Act was amended to include Section 24-A. Section 24-A provided that the Excise Commissioner may grant licence for the manufacture or sale of any ‘foreign liquor’. ‘Foreign Liquor’ was defined in the subordinate Rules to include “all rectified, perfumed, medicated and denatured spirit.”15 The constitutional validity of the amendment including Section 24-A was challenged before the Allahabad High Court. The High Court upheld the challenge. The UP State Legislature enacted the U.P Excise (Amendment) (Re-enactment and Validation) Act 1976 including Section 24-A relying on the decisions of this Court

(f) for requiring persons engaged in the distribution and trade and commerce in any such article or class thereof to mark the articles exposed or intended for sale with the sale price or to exhibit at some easily accessible place on the premises the price-lists of articles held for sale and also to similarly exhibit on the first day of every month, at such other time as may be prescribed, a statement of the total quantities of any such articles in stock; (g) for collecting any information or statistics with a view to regulating or prohibiting any of the aforesaid matters; and (h) for any incidental or supplementary matters, including, in particular, the grant of issue of licences, permits, or other documents and charging of fees therefor. (3) Where in pursuance of any order made with reference to clause (d) of sub-section (2), any person sells any article, there shall be paid to him the price therefor— (a) where the price can consistently with the controlled price, if any, be fixed by agreement, the price so agreed upon; (b) where no such agreement can be reached, the price calculated with reference to the controlled price, if any, fixed under this section; (c) where neither clause (a) nor clause (b) applies, the price calculated at the market-rate prevailing in the locality at the date of sale. (4) No order made in exercise of any power conferred by this section shall be called in question in any Court. (5) Where an order purports to have been made and signed by an authority in exercise of any power conferred by this section, a Court shall, within the meaning of the Indian Evidence Act, 1872 (1 of 1872), presume that such order was so made by that authority. Explanation.—In this section, the expression “article or class of articles” relatable to any scheduled industry includes any article or class of articles imported into India which is of the same nature or description as the article or class of articles manufactured or produced in the scheduled industry.” 13 “UP Excise Act” 14 Vend fee means the fee that is paid by a licenses dealer to sell the products in retain. 15 Section 4(2) of the UP Act provides that the State may declare what shall be deemed to be foreign liquor or country liquor

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in Nashirwar v. State of MP16 and Har Shanker v. Dy. Excise and Taxation Commissioner.17 The Allahabad High Court upheld the validity of the U.P Excise (Amendment) (Re-enactment and Validation) Act 1976.18

7Copy pinpoint7. The appellants in Synthetics & Chemicals v. State of UP 19 (“Synthetics [2J]”), held licenses for wholesale vend of ‘denatured spirit’. They instituted proceedings under Article 226 of the Constitution before the Allahabad High Court for seeking a direction to quash the notification by which vend fee was levied from a wholesale licence dealer of ‘denatured spirit’. The High Court dismissed the petitions. It held that the phrase ‘intoxicating liquors’ in Entry 8 of List II of the Seventh Schedule to the Constitution includes denatured spirit and that the State was, therefore, competent to levy the vend fee on denatured spirit.

8Copy pinpoint8. Proceedings under Article 136 were instituted for challenging the decision of the High Court. Proceedings were also initiated under Article 32 challenging the constitutional validity of the levy of vend fee. A two-Judge Bench of this Court in Synthetics (2J) (supra) heard the writ petition and the appeals against the judgments of the Allahabad High Court together. Three issues arose before the Bench. On the issue of the meaning of the phrase ‘intoxicating liquor’ in Entry 8, the two-Judge Bench referred to the decisions of this Court in State of Bombay v. FN Balsara,20 Nashirwar (supra) and Har Shanker (supra) and held that the decisions indicate that the phrase ‘intoxicating liquor’ in Entry 8 of List II comprises of liquor which contains alcohol, both potable and non-potable.21 The second issue was whether in view of IDRA, the power of the State to regulate alcohol (both potable and non-potable) was denuded. In particular, reference was made to the notification issued by the Union under Section 18-G of the IDRA prescribing the price of various types of alcohol and rectified spirit. The two-Judge Bench referred to the decision of a three-Judge Bench of this Court in Tika

16 [1975] 2 SCR 861 : 1975 AIR 360 17 AIR 1957 SC 414 18 1976 ALJ 436 (FB) 19 [1980] 2 SCR 531 : (1980) 2 SCC 441 20 [1951] 1 SCR 682 : (1951) SCC 860 21 (1980) 2 SCC 441 [18]

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Ramji v. State of UP22 and entry 33 of List III to hold that the State Legislature had the power to legislate regarding the production, supply and distribution of the products of the industries notified by Parliament under Entry 52 of List I.23 The two-Judge Bench further held that the Ethyl Alcohol (Price Control) Order issued by the Central Government in exercise of the power under Section 18G of IDRA did not take away the exclusive rights of the State Government relating to intoxicating liquor.24 The third issue was whether the phrase ‘foreign liquor’ in Section 24-A includes denatured spirit or only alcohol for human consumption. The Bench held that the meaning of the phrase cannot be restricted to alcohol for human consumption since “when liquor is put to any use such as manufacture of other articles, the liquor is all the same consumed.”25

9Copy pinpoint9. Review petitions were filed against the decision of this Court in Synthetics (2J) (supra). Writ petitions were also filed for challenging the rules by which vend fees were levied in Uttar Pradesh, and provisions of various laws enacted by the then State of Bombay, and the States of Tamil Nadu and Andhra Pradesh by which exclusive privilege of dealing with any intoxicant was vested in the State. The matters were heard by a seven-Judge Bench in Synthetics (7J) (supra).

10Copy pinpoint10. Justice Sabyasachi Mukharji, writing for himself and five other judges framed the following issues for consideration: “2. The main question that falls for consideration in these matters is whether the vend fee in respect of the industrial alcohol under different legislations and rules in different States is valid. […] The questions with which we are mainly concerned are the following: Whether the power to levy excise duty in case of industrial alcohol was with the State legislature or the Central legislature; What is the scope and ambit of Entry 8 of List II of the Seventh Schedule of the Constitution?

22 [1956] 1 SCR 393 : AIR 1956 SC 676 23 (1980) 2 SCC 441 [25-28] 24 (1980) 2 SCC 441 [28] 25 (1980) 2 SCC 441 [34]

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Whether, the State Government has exclusive right or privilege of manufacturing, selling, distributing etc. of alcohols including industrial alcohol. In this connection, the extent, scope and ambit of such right or privilege has also to be examined.”

11Copy pinpoint11. The decision, first, laid down the meaning of the terms, ‘rectified spirit’, ‘industrial alcohol’, and ‘ethyl alcohol’. The decision noted that the petitioners and appellants were manufacturers of ‘ethyl alcohol’ and that ‘ethyl alcohol’, which is also known as rectified spirit is an industrial alcohol. The judgement, used the three phases interchangeably: “74. It has to be borne in mind that by common standards ethyl alcohol (which has 95 per cent) is an industrial alcohol and is not fit for human consumption. The petitioners and the appellants were manufacturing ethyl alcohol(95 per cent) (also known as rectified spirit) which is an industrial alcohol. ISI specification has divided ethyl alcohol (as known in the trade) into several kinds of alcohol. Beverage and industrial alcohols are clearly and differently treated. Rectified spirit for industrial purposes is defined as “spirit purified by distillation having a strength not less than 95 per cent of volume by ethyl alcohol”. Dictionaries and technical books would show that rectified spirit (95 per cent) is an industrial alcohol and is not potable as such. It appears, therefore, that industrial alcohol which is ethyl alcohol (95 per cent) by itself is not only non-potable but is highly toxic. The range of spirits of potable alcohol is from country spirit to whisky and the ethyl alcohol content varies between 19 to about 43 per cent. These standards are according to the ISI specifications. In other words ethyl alcohol (95 per cent) is not alcoholic liquor for human consumption but can be used as a raw material input after processing and substantial dilution in the production of whisky, gin, country liquor, etc.”

12Copy pinpoint12. This Court allowed the challenge on the following grounds: a. The phrase ‘intoxicating liquor’ in Entry 8 means ‘liquor which is consumable by human being as it is” for the following reasons: (i) In FN Balsara (supra), this Court was not aware

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of the full use of alcohol as industrial alcohol;26 and (ii) Only two decisions of this Court have dealt with industrial alcohol. One was the decision in Synthetics (2J) (supra) and the other was the decision in Indian Mica and Micancite Industries v. State of Bihar27 in which this Court held that Parliament had the legislative competence to levy tax on alcoholic liquor not fit for human consumption;28 b. The provisions that are challenged are not regulatory but seek to levy a tax.29 List II does not confer the State Legislature the power to levy of tax on industrial alcohol;30 c. In view of Item 26 of the First Schedule to IDRA, the control of alcohol industries vests exclusively in the Union. Thus, the power to issue licenses to manufacture both potable and non- potable alcohol vests in the Central Government;31 d. The State can also not regulate industrial alcohol as a ‘product’ of the controlled industry in terms of Entry 33 of List III because the Union occupies the whole field on industrial alcohol as evinced by Section 18G of the IDRA;32 e. Even otherwise, the impugned provisions do not regulate a product of the scheduled industry. Rather, they deal with the manufacture and sale of industrial alcohol;33 f. The power of the States to legislate on the subject of alcohol is restricted to laws which (paragraph 86 of Synthetics (7J) (supra)): i. Prohibit potable alcohol in terms of Entry 6 of List II which concerns public health; ii. Lay down regulations to ensure that non-potable alcohol is not diverted and misused as a substitute for potable alcohol;

26 (1990) 1 SCC 109 [74] 27 [1971] Supp. 1 SCR 319 : (1971) 2 SCC 236 28 (1990) 1 SCC 109 [75] 29 On the distinction between tax and fee (see (1990) 1 SCC 109 [69-73] 30 (1990) 1 SCC 109 [83] 31 (1990) 1 SCC 109 [85] 32 (1990) 1 SCC 109 [85] 33 (1990) 1 SCC 109 [85]

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iii. Charge excise duty on potable alcohol and sales tax under Entry 52 of List II. However, sales tax cannot be charged on industrial alcohol; and iv. Charge fees on a quid pro quo basis, in return for some service rendered by the state, as distinct from fees for grant of a privilege in terms of Indian Mica (supra).

13Copy pinpoint13. However, the judgment in paragraph 88 makes the following observations: “On an analysis of the aforesaid decisions and practice, we are clearly of the opinion that in respect of industrial alcohol the States are not authorised to impose the impost they have purported to do. In that view of the matter, the contentions of the petitioners must succeed and such impositions and imposts must go as being invalid in law so far as industrial alcohol is concerned. We make it clear that this will not affect any impost so far as potable alcohol as commonly understood is concerned. It will also not affect any imposition of levy on industrial alcohol fee where there are circumstances to establish that there was quid pro quo for the fee sought to be imposed. This will not affect any regulating measure as such.”

14Copy pinpoint14. Paragraph 88 lays down the following three principles: a. States do not have the competence to levy tax on industrial alcohol; b. States have the competence to levy tax on potable alcohol; and c. States have the competence to levy fee on industrial alcohol.

15Copy pinpoint15. Justice Oza in his concurring opinion held: a. The legislative entries in List I and List II clearly demarcate the taxing powers of Parliament and State Legislature. Entry 84 of List I covers levy of excise duty on alcoholic liquor for other than human consumption and Entry 51 of List II covers levy of excise duty on alcoholic liquor for human consumption;34

34 (1990) 1 SCC 109 [97]

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b. Parliament controls the alcohol industry since Item 26 of IDRA deals with industry based on fermentation and alcohol. The competence of the State Legislature under Entry 8 can only be subject to IDRA;35 and c. The regulation of the State under Entry 8 of List II can only be limited to prevent the conversion of alcoholic liquors for industrial use for human consumption. Regulatory fee can be levied by the State for this limited purpose.

iii. The aftermath of Synthetics (7J)

16Copy pinpoint16. Subsequently, the interpretation of the decision in Synthetics (7J) (supra) came up before this Court in numerous occasions. In Shri Bileshwar Khand Udyog Khedut Sahakari Mandali v. State of Gujarat,36 the constitutional validity of Section 58-A of the Bombay Prohibition Act 1949 was challenged. Section 58-A enabled the State Government to direct that “the manufacture, import, export, transport, storage, sale, purchase, use, collection or cultivation of any intoxicant, denatured spiritous preparations, hemp, mhowra flowers or molasses” would be in the supervision of persons appointed by them and the costs of such staff were required to be borne by the person engaged in the activity. This Court rejected the challenge. Relying on Synthetics (7J) (supra), the two-Judge Bench observed that though industrial alcohol is not covered by the regulatory powers under Entry 8 or the taxing power under Entry 51 of List II, the State has powers to ensure that industrial alcohol is not diverted to be used as potable alcohol and this is covered by Entry 33 of List III.37

35 (1990) 1 SCC 109 [100] 36 [1992] 1 SCR 391 : (1992) 2 SCC 42 37 “4. […] Levy as a fee under Entry 8 of List II of Seventh Schedule or excise duty under Entry 51 are different than cost of supervision charged under Section 58-A. The former has to stand the test of a levy being in accordance with law on power derived from one of the constitutional entries. Since Synthetics and Chemicals case [Synthetics and Chemicals Ltd. v. State of U.P. (1990) 1 SCC 109] finally brought down the curtain in respect of industrial alcohol by taking it out of the purview of either Entry 8 or 51 of List II of Seventh Schedule the competency of the State to frame any legislation to levy any tax or duty is excluded. But by that a provision enacted by the State for supervision which is squarely covered under Entry 33 of the Concurrent List which deals with production, supply and distribution which includes regulation cannot be assailed. The bench in Synthetics and Chemicals case [Synthetics and Chemicals Ltd. v. State of U.P. (1990) 1 SCC 109] made it clear that even though the power to levy tax or duty on industrial alcohol vested in the Central Government the State was still left with power to lay down regulations to ensure that non-potable alcohol, that is, industrial alcohol, was not diverted and misused as substitute for potable alcohol. This is enough to justify a provision like Section 58-A.”

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This decision was followed by another two-Judge Bench in Gujchem Distillers India v. State of Gujarat.38

17Copy pinpoint17. In State of AP v. McDowell,39 the prohibition of sale and consumption of intoxicating liquor in the State of Andhra Pradesh was challenged. The petitioners submitted that the State did not have the competence to prohibit consumption. For this purpose, reference was made to the observations in paragraph 85 of Synthetics (7J) (supra), where the Court had observed that after the enactment of IDRA, the power to issue licenses to manufacture both potable and non-potable liquor vested in Parliament. The three-Judge Bench rejected the argument by referring to observations in paragraph 86(a) Synthetics (7J) (supra) that States have the power to enact legislation in the nature of prohibiting potable liquor.40 In Vam Organic Chemicals v. State of UP41 [“Vam Organic I”], the rules issued under the UP Excise Act providing for power to issue licenses for denaturation of spirit and levy of denaturing fee was challenged. Justice A M Ahmadi (as the learned Chief Justice then was) writing for the two-Judge Bench noted that Synthetics (7J) (supra) did not hold that the State will not have any power over ‘industrial alcohol’.42 Specifically, the two-Judge Bench referred to the observations in paragraph 86(b) that the State may lay down regulations to ensure that non-potable alcohol is not misused as a substitute for potable alcohol. Justice Ahmadi observed that the process of denaturing was to ensure it was not misused as potable alcohol which would be covered by the observations in Synthetics (7J) (supra).43

18Copy pinpoint18. In Bihar Distillery v. Union of India,44 the petitioner challenged the State’s cancellation of their license for preparing “rectified spirit” on the ground that the State lacked competence in view of

38 [1992] 1 SCR 675 : (1992) 2 SCC 399 39 [1996] 3 SCR 721 : (1996) 3 SCC 709 40 (1996) 3 SCC 709 [33] 41 [1997] 1 SCR 403 : (1997) 2 SCC 715 42 [1997] 1 SCR 403 : (1997) 2 SCC 715 [13] 43 (1997) 2 SCC 715 [13,14] “14. It is to be noticed that the States under Entries 8 and 51 of List II read with Entry 84 of List I have exclusive privilege to legislate on intoxicating liquor or alcoholic liquor for human consumption. Hence, so long as any alcoholic preparation can be diverted to human consumption, the States shall have the power to legislate as also to impose taxed etc. In this view, denaturation of spirit is not only an obligation on the States but also within the competence of the States to enforce. [ emphasis supplied] 44 [1997] 1 SCR 680 : (1997) 2 SCC 727

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Synthetics (7J) (supra). Justice B P Jeevan Reddy, writing for the two-Judge Bench held that the observations in paragraph 85 that Parliament has legislative competence over both potable and non- potable alcohol in view of the enactment of IDRA was a typographical error.45 The Bench further observed that Synthetics (7J) (supra) was mainly concerned with legislative competence over “denatured rectified spirit” (which was exclusively and wholly industrial alcohol) and not “rectified spirit” (which could be used directly for industrial purposes or denatured for industrial purposes or used to prepare liquor for human consumption.)46 This Court held that the line of demarcation must be drawn at the stage of clearance of the rectified spirit since it was used for the preparation of both potable alcohol (over which the State had competence under Entry 8 of List II) and non-potable alcohol (over which the State did not have competence under Entry 8 of List II): “23. The line of demarcation can and should be drawn at the stage of clearance/removal of the rectified spirit. Where the removal/clearance is for industrial purposes (other than the manufacture of potable liquor), the levy of duties of excise and all other control shall be of the Union but where the removal/clearance is for obtaining or manufacturing potable liquors, the levy of duties of excise and all other control shall be that of the States. This calls for a joint control and supervision of the process of manufacture of rectified spirit and its use and disposal.”

19Copy pinpoint19. The decision further elucidated the realm of competence of the State and the Union with respect to (a) industries engaged in manufacturing rectified spirit meant exclusively for supply to industries; (b) industries engaged exclusively in manufacturing rectified spirit for production of potable alcohol; and (c) industries engaged in both of the above. This demarcation will be discussed in detail in the subsequent sections of the judgment. To understand the manner in which Bihar Distillery (supra) interpreted the judgment in Synthetics (7J) (supra), it is sufficient at this stage to know that the demarcation of the competence was based on the purpose for which the rectified spirit was used.

45 (1997) 2 SCC 727 [12] 46 (1997) 2 SCC 727 [23]

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20Copy pinpoint20. In Government of Haryana v. Haryana Brewery,47 a two-Judge Bench noted the dissonance in multiple decisions interpreting the judgment in Synthetics (7J) (supra) and directed that the papers may be placed before the Chief Justice for listing the matters before the Constitution Bench. In particular, the Bench noted the observations in (i) McDowell (supra) that the State has competence over production to sale of “intoxicating liquor”; (ii) Vam Organic I (supra), that State has competence over “denatured spirit”; and (iii) Bihar Distillery (supra) that the State’s competence over “rectified spirit” depended on the purpose for which spirit was going to be used. The Bench also noted the observations of a three-Judge Bench in State of UP v. Modi Distillery48 that the State does not have the legislative competence to levy excise duty on the material or input that is used in the process of producing alcoholic liquor for human consumption by relying on Synthetics (7J) (supra).49 However, it must be noted that the Bench in Modi Distillery (supra), specifically recorded that it does not “express any opinion in regard to the power of the State to regulate the manufacture of alcoholic liquors for human consumption.”50

21Copy pinpoint21. Meanwhile, another two-Judge Bench51 referred the decision in Bihar Distillery (supra) to a larger Bench on the ground that it was prima facie contrary to the scheme of legislative competence as examined by the Constitution Bench of this Court and the three- Judge Bench decision of this Court in Modi Distillery (supra). The three-Judge Bench in Deccan Sugar & Abkari v. Commissioner of Excise, AP,52 without overruling the decision in Bihar Distillery (supra) observed that this Court in Synthetics (7J) held that the State Legislature does not have the competence to levy any excise

47 (1997) 5 SCC 758 48 [1995] Supp. 3 SCR 119 : (1995) 5 SCC 753 49 In this case, the challenge was to the levy of excise duty on wastage in the preparation of Indian Made Foreign Liquor (IMFL), pipeline wastage and obscuration (which is the process of adding caramel to spirit for the preparation of rum. The Bench relied on the observations in Synthetics (7J) that the phrase ‘alcoholic liquor for human consumption’ means the liquor that is consumable “as it is” to hold that the State does not have the power to levy excise duty on the stages of manufacture or preparation of the liquor. 50 (1995) 5 SCC 753 [14] 51 Deccan Sugar and Abkari Co. Ltd. v. Commissioner of Excise, AP (1998) 3 SCC 272 52 (2004) 1 SCC 243

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duty on “rectified spirit”.53 Subsequently, another two-Judge in State of UP v. Vam Organic54 [“Vam Organic (II)”], dealt with the challenge to the levy of license fee on ‘denatured industrial alcohol’, a raw material used in the preparation of Organic compounds. In that case, the State had submitted that it had the power to levy the fee because denatured alcohol could be renatured to produce potable alcohol which is covered by paragraph 86(b) of the decision in Synthetics (7J). The Bench rejected the submission holding that the State Government is competent to levy fee to ensure that industrial alcohol (which the judgment used alternatively for ethyl alcohol) is not “surreptitiously converted into potable alcohol so that … the public is protected from consuming illicit liquor”. However, the Bench relying on Vam Organic I (supra) noted that the power stops with denaturing and that even if denatured alcohol can be re-natured, the States would not have the power to regulate it. The relevant observations are extracted below: “43. […] We are of the view that the State Government is competent to levy fee for the purpose of ensuring that industrial alcohol is not surreptitiously converted into potable alcohol so that the 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 seism of the State Legislature. Assuming that denatured spirit may by whatever process be renatured (a proposition which is seriously disputed by the respondents) and then converted into potable liquor, this would not give the State the power to regulate it. Even according to the demarcation of the fields of legislative competence as envisaged in Bihar Distillery industrial alcohol for industrial purposes falls within the exclusive control of the Union and according to Bihar Distillery “denatured rectified spirit, of course, is wholly and exclusively industrial alcohol.” (emphasis supplied)

53 (2004) 1 SCC 243 [2] 54 (2004) 1 SCC 225

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iv. The Reference Order(s)

22Copy pinpoint22. Separately, the State of UP levied an ad valorem licence fee on the sale of specially denatured alcohol by a wholesale vendor to those holding a licence under Form FL 4155 of the UP Excise Act. The fee was levied under the provisions of the UP Spirit Rules. The petitioner in RP Sharma v. State of UP56 instituted a writ petition before the Allahabad High Court, inter alia, for challenging the relevant rule and for a refund of the fee collected by the state.

23Copy pinpoint23. A Division Bench of the Allahabad High Court allowed the petition, relying on the decision in Vam Organic-II (supra) since the fee was levied on the sale of denatured spirit and not to ensure that rectified spirit was not diverted for human consumption. The State of UP preferred an appeal against the decision before this Court, resulting in the present proceedings. The Court issued notice on the matter and granted an interim stay of the judgment of the High Court on 27 August 2004. By its order dated 25 October 2007, a three-Judge Bench of this Court in State of UP v. Lalta Prasad57 agreed with the submissions advanced by counsel for the appellants on the need for reconsideration by a larger bench. Numerous decisions were relied on to argue that Section 18G of the IDRA would not deprive the States of the power to enact laws with respect to Entry 33 of List III. The appellants argued that a notification ought to be issued under Section 18G for the field under Entry 33 to be occupied. Justice Altmas Kabir, writing for the three-Judge Bench observed that that the question of whether Section 18G occupies the field of Entry 33 on the alcohol industry needs to be referred to a Constitution Bench: “26. … The 7 Judge Bench did not also have the benefit of the reasoning in Ch. Tikaramji’s case (supra) which had held that in the absence of any notified order under Section 18-G of the 1951 Act no question of repugnancy could arise, which Mr. Dwivedi urged, recognised the State’s power to legislate with regard to matters under Entry 33 of List III notwithstanding the provisions and existence of Section 18-G in the 1951 Act.

55 Form FL 41 is meant for those industries where alcohol is used as a solvent but some alcohol continues to remain in final products such as lacquers, varnish, polishes, adhesives, anti-freezers and brake fluids. 56 2004 SCC OnLine All 159. 57 [2007] 11 SCR 670 : (2007) 13 SCC 463

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27. Mr. Dwivedi then went on to refer to the judgment of this Court in SIEL Limited v. Union of India (1998) 7 SCC 26 wherein the learned Judges relying on the policy decision in Ch. Tikaramji’s case (supra) explained and distinguished the decision of the 7 Judge Bench in Synthetics and Chemicals case (supra). […]

28. Yet another case referred to by Mr. Dwivedi was the decision of a Constitution Bench of 5 Judges of this Court in Belsund Sugar v. State of Bihar (1999) 9 SCC 620 […]. In the said case also it was observed by the Constitution Bench that in the absence of promulgation of any statutory order covering the filed under Section 18-G it could not be said that mere existence of a statutory provision for entrustment of such power would result in regulation of purchase and sale of flour even if it is a scheduled industry. It may be noted that even while noting the decision of the 7 Judge Bench in Synthetics and Chemicals case (supra) the Court placed reliance on the decision rendered in the SIEL Ltd. Case (supra). …

35. On consideration of the aforesaid submissions made on behalf of the respective parties, we are of the view that Mr. Dwivedi’s submissions have a good deal of force, since by virtue of the interpretation of Section 18-G in the Synthetics and Chemicals case (supra) the power of the State to legislate with matters relating to Entry 33 of List III have been ousted, except to the extent as explained in the Synthetics and Chemicals case in paragraphs 63-64 of the judgment, where the State’s power to regulate, as far as regulating the use of alcohol, which would include the power to make provisions to prevent and/ or check industrial alcohol being used as intoxicant liquor, had been accepted. … As submitted by Mr. Dwivedi, the 7 Judge Bench did not have the benefit of the views expressed by this Court earlier in Ch. Tikaramji case (supra) where the State’s power to legislate under the Concurrent List stood ousted by legislation by the Central Government under Entry 52 of List I and also

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in view of Section 18-G of the Industries (Development and Regulation) Act, 1951.

36. In our view, if the decision in the Synthetics and Chemicals case (supra) with regard to the interpretation of Section 18-G of the 1951 Act is allowed to stand, it would render the provisions of Entry 33 (a) of List III nugatory or otiose.

37. We are, therefore, also of the view that this aspect of the matter requires reconsideration by a larger Bench of this Court, particularly, when the views expressed by 7 Judge Bench on the aforesaid question have been distinguished in several subsequent decisions of this Court, including the two decisions rendered by Constitution Benches of five Judges.” (emphasis supplied)

24Copy pinpoint24. This Court formulated six questions for adjudication by a larger Bench. They are reproduced below: a. Does Section 2 of the IDRA have any impact on the field covered by Section 18G of the same or Entry 33 of List III of the Seventh Schedule? b. Does Section 18G of the aforesaid Act fall under Entry 52 of List I of the Seventh Schedule of the Constitution, or is it covered by Entry 33 of List III thereof? c. In the absence of any notified order by the Central government under Section 18G of the above Act, is the power of the State to legislate in respect of matters enumerated in Entry 33 of List III ousted? d. Does the mere enactment of Section 18G of the IDRA, give rise to a presumption that it was the intention of the Central government to cover the entire field in respect of Entry 33 of List III so as to oust the States’ competence to legislate in respect of matters relating thereto? e. Does the mere presence of Section 18G of the IDRA, oust the State’s power to legislate in regard to matters falling under Entry 33(a) of List III?

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f. Does the interpretation given in Synthetics (supra), in respect of Section 18G of the IDRA correctly state the law regarding the States’ power to regulate industrial alcohol as a product of the Scheduled industry under Entry 33 of List III in view of clause (a) thereof?

25Copy pinpoint25. The batch was placed before a Constitution Bench pursuant to the above order. By an order dated 8 December 2010, the Constitution Bench observed that the decision in Synthetics (7J) (supra) requires to be considered by a Bench of nine Judges and directed the matter be placed before a larger Bench: “Having meticulously examined the judgment of the Constitution Bench of seven learned Judges in the case of Synthetics and Chemical Limited & Ors. vs. State of Uttar Pradesh & Ors., reported in 1990 (1) SCC 109, we are of the view that the matter requires consideration by a Bench of nine Judges.”

26Copy pinpoint26. Though the three-Judge Bench by an order 25 October 2007 only referred the issue of the interplay between Section 18-G of the IDRA and Entry 33 of List III to the Constitution Bench, the order of the Constitution Bench categorically noted that the correctness of the decision in Synthetics (7J) ought to be reconsidered by a nine Judge Bench. Thus, this Bench is not limited to the questions framed by the three-Judge Bench.

B. Submissions

i. Appellants’ submissions

27Copy pinpoint27. This Court held in Synthetics (7J) (supra) that denatured spirit is industrial alcohol and is outside the jurisdiction of States under Entry 8, List II of the Seventh Schedule to the Constitution. It held that Entry 8, List II deals only with potable alcohol. Mr Dinesh Dwivedi, learned senior counsel representing the State of UP assailed the reasoning in Synthetics (7J) (supra) and argued that the States have jurisdiction over industrial alcohol. He submitted that: a. Legislative entries are fields of legislation and must be read widely and construed liberally to maintain the federal balance. The exclusive jurisdiction of the States cannot be ousted by a Parliamentary enactment. Article 245 of the Constitution is

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subject to Article 246 and therefore the division of legislative powers must be given their full effect; b. The term ‘intoxicating liquors’ appearing in Entry 8 of List II of the Seventh Schedule to the Constitution has a rich history and legislative practice accompanying it; c. The term ‘intoxicating liquors’ in Entry 8 of List II is borrowed from Entry 31, List II of the 1935 Act. The 1935 Act was enacted by the British Parliament when the term ‘intoxicating liquors’ had attained a specific meaning. This meaning can be discerned from Section 110 of the License Consolidation Act 1910 and Sections 3, 4, 5, 116 of the Spirit Act 1880; d. In British legislations, the words ‘intoxicating liquors’ were defined to include spirit of all kinds including fermented and distilled spirits. The terms ‘intoxicating liquors’ and ‘spirit’ or ‘liquor of all kinds’ were used interchangeably in laws in England; e. Various provincial statutes defined the words ‘liquor’ and ‘sprit’ to include all liquids containing alcohol.58 These legislations were enacted with the knowledge that alcohol is used for industrial purposes. ‘Intoxicating liquors’ in Entry 8 of List II of the Seventh Schedule to the Constitution is a comprehensive phrase which connotes all liquids containing alcohol. Therefore, liquor and spirit including industrial alcohol have always been under the jurisdiction of States; f. The 1935 Act used different phrases in Entries 31 and 40 of List II of its Seventh Schedule. These entries are relatable to Entries 8 and 51 of List II of the Seventh Schedule to the Constitution respectively. Whereas the phrase ‘alcoholic liquor for human consumption’ is used in Entry 51 List II for taxation purposes, Entry 8 of List II uses the word ‘intoxicating liquors’. Similarly, Entry 84 of List I uses the phrase ‘alcoholic liquor not for human consumption’ and Article 47 uses the phrase ‘intoxicating drinks’. It would be irrational to presume that the framers of the Constitution used different phrases to mean the same thing;

58 Bombay Abkari Act 1878, Madras Abkari Act 1886, Bengal Excise Act 1909, Bihar Excise Act 1915, MP Excise Act 1915, Punjab Excise Act 1914, Chhattisgarh Excise Act 1915 and UP Excise Act 1910.

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g. The term ‘liquors’ used in a legislation under Entry 31 of List II of the Seventh Schedule to the 1935 Act was accepted to mean all alcoholic liquids by this Court in FN Balsara (supra). The language of Entry 8 of List II of the Seventh Schedule to the Constitution is borrowed from Entry 31 of List II of the Seventh Schedule to the 1935 Act and must be deemed to have the same meaning; h. Entry 84 of List I of the Seventh Schedule to the Constitution uses the phrase ‘alcoholic liquor not for human consumption’. Usage of widely different terms in the Constitution would appear irrational if ‘intoxicating liquors’ was understood to exclude alcohols used in industries; i. Entry 8 of List II includes alcohols used in industries. Since it is a specific entry in List II, alcohols used in industries will be excluded from the general entry on industries in Entry 24 of List II. The Union cannot take over any industry in pursuance of Entry 52 of List I unless the industry falls under Entry 24 of List II. Therefore Parliament cannot takeover industrial alcohol by making a declaration under the IDRA, which relates to Entry 52 of List I; j. Entry 8 of List II is not subject to any other entry in the Seventh Schedule. The Constitution makes specific mention where it intends a legislative field to be subject to other entries in the Seventh Schedule; and k. Synthetics (7J) (supra) fell into error by not considering the traditional meaning of ‘intoxicating liquors’. It also failed to notice all previous decisions, like Ch Tika Ramji v. State of UP,59 which defined ‘industry’ for the purpose of Entry 24 of List II and Entry of 52 List I and delineated its scope. It held that the product of an industry notified under the IDRA falls under Entry 33 of List III.

28Copy pinpoint28. Mr Dwivedi submitted that Entry 8 of List II governs the production, manufacture, possession, transport, purchase and sale of intoxicating liquors. Since alcohols used in industries fall within the remit of ‘intoxicating liquors’ the State legislature has exclusive and inalienable

59 [1956] 1 SCR 393 : 1956 SCC OnLine SC 9