Can States Levy Tax Only On Alcohol Fit For Human Consumption? Supreme Court 9-Judge Bench Considers [Day 2 ]

Mr Dwivedi highlighted that while Entry 8 List II is a specific provision expressly mentioning the sector of 'intoxicating liquor', Entry 52 List I though not only general in nature, only gets activated by virtue of Entry 24 List II which provides the term “ Industries” but except those which are consumed under Entrt 52 List I. Thus it was submitted that Entry 52 List I has to be seen as a part and parcel of Entry 24 List II, mirroring the same limitations as Entry 24 List II would have.

Mr Dwivedi expressed: “When we compare the two entries, Entry 8 List II and Entry 52 List I there is a vast difference in the language. … If you have to see the expanse of the scope of Entry 52 List I, you have to see that Entry 52 List I is by itself not a field of legislation, it becomes only when a declaration is made with regards to that Industry. Then that industry, it is transported from Entry 24 List II and comes to Entry 52 List I, so the source of the power of the field is Entry 24 List II ….so whatever is dragged out of Entry 24 List II that comes to Entry 52 List I nothing more. So there are two ways of looking at this, when we want to see the expanse of the word industry, then we must go back to the source, which is Entry 24 List II, because whatever is contained there can possibly come here, Entry 52 cannot possibly drag more than what is there in the well or the source.”

The senior counsel further added that to understand the expression ' Industry' used in Entry 52 List I, one has to see the scope within which the said expression is used under Entry 24 List II.

“Now this word 'industry' under Entry 24 List II what is the expanse of that ? As your lordships have seen all the cases were unanimous that the word ' industry' in Entry 52 List I would mean the same as Entry 24 List II. There is an intricate and intimate link between the two which cannot be snapped. Now if the word 'Industry' is of limited expanse, then we cannot expand the scope of Industry in Entry 52 List I beyond what is there in Entry 24 List II.”

During the hearing, the CJI highlighted how there was considerable clarity between the Union and State List when it comes to the levy of excise duties on alcohol. It was observed that the central government can collect taxes - excise duties, on all manufactured goods. However, there's an exception for alcohol meant for drinking. The right to collect taxes on this type of alcohol has been handed over to state governments.

“ The bifurcation in regards to the centre on one hand and states on the other is in respect of the levy of the duties of excise. What the central list does is, the power to levy duties of excise on all goods manufactured in India excluding alcohol fit for human consumption. The duty of excise on alcohol which is fit for human consumption which is taken out from Entry 84 List I (Union's power on duties of excise on tobacco and other goods except for alcohol for human consumption) is given to Entry 51 List II(State's powers on duties on excise on goods manufactured in the state including human consumption alcohol). This is bifurcation as to the taxing power.”

However, on the contrary, the CJI stressed that there was no clarity in the division for the substantive law-making aspects of alcohol as an industry. It was also noted that while Entry 8 List II mentions the expression “ Intoxicating liquor”, the state only has the power to levy excise duties for alcohol which is drinkable.

Now in so far as the substantive power to regulate is concerned, there is no division at all. The only reference to substantive power to legislate on intoxicating liquor is with regards to Entry 8 List II. Entry 8 List II would therefore cover the broad gamet whether it is fit for human consumption or unfit. Even though you have the power under Entry 8 List II, the state cannot levy the duty of excise on alcohol which is not fit for human consumption.

The CJI further pointed out that there is no clarification as to whether the substantive field of alcohol in List I is either fit or unfit for human consumption.

“List I is advisedly silent with regards to that. There is no specific provision in List I, except in regards to taxing”

Mr Dwivedi then reverted, “ The question is, that when they were dividing the object (alcohol) into two, for the purposes of tax, were they oblivious of the fact that there are two separate categories? The fact is that they realised that the liquor containing alcohol is included, all liquors containing alcohol is included in Entry 8 List II (Intoxicating liquor)”

Underpinning the enigmatic nuances of federal divisions, the CJI further observed how on one hand the framers of the constitution allowed the state control over industries, but at the same time balanced with the exception of public interest under Entry 52 List I. Neither does the state have complete control over levying excise duties on all types of goods.

“ Look at the beauty of the constitutional division. Entry 24 List II covers all industries. So the entire gamut of the industry is governed by the State under Entry 24 List II except whatever is declared by the Centre to be a controlled industry under Entry 52 List I, yet the state has full industrial powers on the industry, you cannot impose a duty of excise on goods produced by your industry. The power to impose a duty of excise is only given to the centre.”

Mr. Dwivedi clarified that the reason behind this was because post-independence, the Union was in need of funds to run the official affairs of the country, and excise constituted a big chunk in the central revenues

The bench led by CJI DY Chandrachud comprises Justices Hrishikesh Roy, Abhay S. Oka, B.V. Nagarathna, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma And Augustine George Masih. The present matter was referred to a nine-judge bench in 2007 and pertains to the interpretation of Section 18G of the Industries (Development and Regulation) Act, 1951(IDR Act). Section 18G allows the Central Government to ensure that certain products related to scheduled industries are distributed fairly and are available at reasonable prices. They can do this by issuing an official notification to control the supply, distribution, and trade of these products. However, as per Entry 33 of List III of the Seventh Schedule to the Constitution, the State legislature has the power to regulate trade, production, and distribution of products from industries under Union control and similar imported goods. It was argued that in Synthetics and Chemical Ltd. vs. State of U.P., a seven-judge bench had failed to address Section 18G's interference with the concurrent powers of the State. Accordingly, the Supreme Court held–

"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."

The matter was then referred to a nine-judge bench. It may be noted that apart from Entry 33 List III, Entry 8 List II also provides regulation powers to the state with regards to 'Intoxicating Liquor'. As per Entry 8 List II, the state has law-making powers over - “ Intoxicating liquors, that is to say, the production, manufacture, possession, transport, purchase and sale of intoxicating liquors”

Case of Tika Ramji At A Different Footing Than The Present One - Mr Dwivedi Explains

Revisiting the jurisprudence on the definition of 'industry', the CJI pointed out how in the case of Tika Ramji v. State of U.P., the definition of 'industry' was segregated into 3 parts - (1) raw materials; (2) manufacture or production and (3) distribution.

The CJI noted, “They say (the then constitution bench) that raw materials cannot be covered under Industry. Manufacture or production also cannot be covered under industry unless it is a controlled industry. Once it is a controlled industry, manufacture and production will also be covered by Entry 52 List I, but they say even with respect to a controlled industry, distribution of the products will go to Entry 33 list III.”

In Tikaramji, there existed a clash of law-making powers over the subject matter. The question over the validity of the 1953 UP Sugarcane (Regulation of Supply and Purchase) Act, which serves as the basis for the 1954 UP Sugarcane Supply and Purchase Order, was brought to the fore. The critiques of the act's legitimacy hinged on the viewpoint that it encompasses the 'industry' field, an area the Union is considered to occupy in oversight for the want of public interest, under the Parliament's directive in Entry 52 of List I. In response, the Industries (Development and Regulation) Act was enacted by Parliament in 1951. This legislation underscored the Union's crucial role in regulating specific industries for the common good, enumerating these industries in the First Schedule, which includes those that deal with the manufacturing or production of sugar.

The Court interpreted that the concept of "industry" includes three primary elements: essential raw materials for industrial activities, the actual process of manufacturing or production, and the distribution process of the end products. It was explained that issues pertaining to the manufacturing process are covered by Entry 24 of List II unless the industry is under the jurisdiction of the central government, at which point, it is governed by Entry 52 of List I.

Contrary to the argument that Entry 52 of List I mentions of "industries" is wide-ranging enough to encompass laws regarding raw materials or the distribution of industrial goods, the Court clarified that such components do not fall within Entry 52 of List I domain.

Drawing a key distinction on facts, Mr Dwivedi clarified that in Tika Ramji, the issue pertained to sugarcane which held as a raw material and not a product. The present issue however deals with industrial alcohol or 'denatured alcohol' which has been considered as a product of a notified industry under the IDR Act Schedule I in the heading '26. Fermentation Industries- alcohol'.

“ Tikaramji was a case of Entry 33 List III because there was an Entry containing 'foodstuff' over there and therefore it fell within Entry 33 List III. Not because it was a product of the notified Industry. Sugarcane was never regarded as a product of notified industry”

Entry 33 List III provides “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;...”

Mr Dwivedi explained, that since Entry 33 List III had an express subject matter of 'foodstuff', thus sugarcane was observed to be covered under Entry 33 List III not taken within the ambit of 'industry'. He stressed the need to test the present issue on whether industrial alcohol would be coming within the ambit of Entry 24 List II for it to be considered as part of a notified industrial product under Entry 52 List I.

“ Tikaramji has been misunderstood. Because Tikaramji is not a case of product of a notified industry but instead raw material of the industry, which is sugarcane. Tikaramji segregated the end product as well as the raw material. It first went to Entry 24 List II and therefore what I submit is let us first go to Entry 24 List II and let us carve out what is included in Entry 24 List II in the State List. As I said the source is 24, if the source doesn't contain something then perhaps you cannot expand the source by taking over in Entry 52 List I.”

Synthetic Chemicals Decision Misunderstands The Concept Of Alcohol - Sr Adv Datar Brews The Distinction Between Denatured v. Portable Alcohol

Senior Advocate Mr Arvind Datar representing the state of U.P essentially weaved the factual fallacies in understanding the industrial procedure of making alcohol in the decision of Synthetic Chemicals which required serious relook by the bench, these were as contended:

1. The decision in Synthetic Chemicals requires to be overruled as it flaws in mixing up 'industrial alcohol'(denatured) and 'rectified spirit'(potable) as synonymous. Mr Datar explained that the court therein failed to understand the distinction between the two types of substances. While 'rectified spirit' or ethyl alcohol is fit for human consumption, industrial alcohol is not. He also submitted that there exists no such term as 'industrial alcohol' in the legal jargon and is perhaps a “loose commercial term to say this spirit is denatured”.
2. Synthetic Chemicals additionally errors in holding Entry 51 List II which uses the phrase 'Alcoholic Liquor for human consumption' mistakenly as 'Alcoholic Liquor fit for human consumption'. It further erred in giving a contradiction, while on hand the decision observed that states had no powers regarding alcohol regulation but in the later half it acknowledged its powers to levy regulatory dues.

Mr Datar placed reliance upon the following findings in Synthetic Chemicals to buttress the above contentions, as to show that the decision was incorrect in understanding the difference between Industrial Alcohol and Rectified Spirit.

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 raw material input after processing and substantial dilution in the production of whisky, gin, country liquor, etc….”

Mr Datar expressed, “If these passages are overruled then the entire law gets in place”

To further illustrate the factual misunderstanding, Mr Datar read out the following observations from paragraph 54 :

54. We have no doubt that the framers of the Constitution when they used the expression 'alcoholic liquor for human consumption' they meant at that time and still the expression means that liquor which as it is is consumable in the sense capable of being taken by human beings as such as beverage of drinks…

Highlighting the fallacy, Mr Datar explained that the Extra Neutral Alcohol (ENA-95% Alcohol with a neutral smell and taste) is extracted by sugar industries from molasses which is then sold to various companies making various products from the ENA. The ENA from the sugar industry is perhaps potable alcohol which may not be fit for human consumption in its original form. However, it is alcohol for human consumption upon which excise duty is levied.

“ so my humble submission is, this statement 'alcoholic liquor for human consumption' please do not add the word 'fit' in that. Alcoholic liquor for human consumption means alcoholic liquor which is capable of human consumption”

Limitation On The Parliament Under Article 254 (1)

Mr Datar argued that the phrase under Article 254 (1) “Parliament is competent to enact” should be given special emphasis in light of the specific powers given to the state legislature to make laws on the regulation of 'intoxicating liquor'.

Article 254(1) states: If any provision of a law made by the Legislature of a State is repugnant to any provision of a law made by Parliament which Parliament is competent to enact, or to any provision of an existing law with respect to one of the matters enumerated in the Concurrent List, then, subject to the provisions of clause (2), the law made by Parliament, whether passed before or after the law made by the Legislature of such State, or, as the case may be, the existing law, shall prevail and the law made by the Legislature of the State shall, to the extent of the repugnancy, be void.

Mr Dattar explained, that the only condition when the Parliament can take over the field originally assigned to the State Legislature, is when the former is competent by law to arrogate to itself such powers under Article 254(1). Since Entry 8 List II exclusively delegates the law-making powers on intoxicating liquor to the state, it would not be correct for the Parliament to assume otherwise.

“ I am only trying to say that the words between the two commas 'which Parliament is competent to enact'... if Entry 8 List II has given exclusive powers to the state in the context of manufacture, production, transportation etc of intoxicating liquor, Parliament has no competence to get into 'intoxicating liquor' on those fields. Because it is not any law made by the Parliament, it should be a law which Parliament is competent to make. And my submission is that the non-obstante clause only talks of a law - competent law of the Parliament.”

The senior counsel gave the example of a situation where the Parliament makes a sales tax law, which it is not competent to make, such a law would be considered void. He thus expressed, “ Then you cannot say that no, Parliament in federal structure is supreme.”

It was further clarified that 'denatured spirit'(non-suitable for human consumption) or 'industrial alcohol' was perhaps the offspring of 'intoxicating liquor'. The process is that from the molasses there is rectified alcohol, from rectified alcohol ENA is obtained and then it is the ENA which is branched further to denatured alcohol/ industrial alcohol.

Mr Dattar concluded by briefly submitting that in future a law made by the Parliament which has not commenced should not affect the state's powers to legislate upon the field of potable alcohol.

“ Suppose tomorrow the Parliament makes a law and doesnt bring it to force, the states cannot be paralysed or stultified. A law made by the Parliament will be a law only if brought into force.”

Mr Dattar was referring to the decision in State of Kerala v. Mar Appraem Kuri Co. Ltd., (2012) 7 SCC 106 wherein it was held that the State law would become repugnant as soon as the Parliamentary law is made irrespective of whether the law has commenced or not. The senior counsel urged that such a ruling would require a relook by the bench in view of the arguments made by him.

Senior Advocate Mr Jaideep Gupta appearing on behalf of the State of West Bengal made the following submissions in brief - (1) all alcohol being intoxicating liquor, comes under Entry 8 List II except for excise duties ; (2) Since all alcohol comes under the ambit of Entry 8 List II, it is therefore excluded from Entry 24 List II and Entry 52 List I; (3) Thus the entirety of the control on intoxicating alcohol should lie with the state.

In the alternative, Mr Gupta argued that in the event, that the bench does not consider all alcohol to be a part of intoxicating liquor, then the decision in Synthetic Chemicals should be overruled on the grounds that that threefold classification of Tika Ramji (which is followed till today) on the definition of 'industry' has not been taken into consideration therein. The threefold classification essentially breaks down the concept of 'industry' into - raw materials, manufacturing or production and then distribution- that is 3 stages pre-production, production and post-production. As per the decision, only the second classification- production/ manufacturing is covered by the term industry.

Applying the above proposition to the present facts, Mr Gupta explained that both human consumable and non-consumable (industrial ) alcohol would be excluded from the ambit of 'industry' under Entry 52 List I which gives control to the Union for notified industries in the public interest. Portable/ Human Consumable Alcohol comes under Entry 8 List II as post-2016, it is no longer a notified product. With regards to denatured spirit/ industrial alcohol, Mr Gupta submitted that the majority of the process for manufacturing denatured spirit is common to that of potable alcohol.

“ Upto the stage of ENA, there is only one process. If the state imposes any regulations in the manufacture of ENA, it cannot make a distinction between the end product. At that stage it is not known what is the end product…..after the denature is added, the product has already come into being. So there the industrial/ denatured spirit is actually in the second stage- production and manufacture has been completed of that product. After that comes the question of distribution which will go into Entry 33 List III, why because, denatured spirit is certainly excluded by the schedule of the IDR Act, so the notified product is the denatured spirit”

Applying the legal principles, Mr Gupta analysed that (1) the raw materials used in the notified product -ENA is within the states power under Entry 8 List II; (2) the distribution (post-production stage) is also coming within the state's power under Entry 6 List II (public health & sanitation) and (3) denatured spirit itself can re-enter the potable zone if diluted with water and mixed with an existing portable alcohol like whiskey, it comes within the consumable zone and reverts with the ambit of State powers.

Senior Advocate Mr V Giri representing the State of Kerala made a varying argument in short - he contended that apart from industrial alcohol which is a matter of difference in manufacturing, all other alcohols forming part of intoxicating liquor would come under the ambit of Entry 8 List II. He argued that every activity which would be comprehended by an industry relating to any product is textually covered by Entry 8 List II to the context of intoxicating liquors. Thus Entry 24 List II will have to exclude intoxicating liquors.

The bench will continue the hearing today.