'Intoxicating Liquor' Doesn't Include 'Denatured Spirit', But Includes 'Extra Neutral Alcohol' : State Of Kerala To Supreme Court

“Denatured spirit is an end product and therefore it can be synonymous to industrial alcohol, it would not come within the purview of Entry 8 List II, because Entry 8 is about intoxicating liquor and we have no material to assume even upon the hypothetical basis that denatured spirit would be a raw material for potable alcohol/ rectified spirit.”

Other States like Uttar Pradesh, West Bengal and Maharashtra have taken the stance that 'intoxicating liquor' is wide enough to cover 'industrial alcohol' as well.

Mr Giri highlighted that ENA was procedurally constituted as a raw material in the process of making 'intoxicating liquor' or potable alcohol in its final form. Since it forms part of the production process for potable alcohol, ENA is covered under the State's legislation-making powers under Entry 8 List II.

“Every aspect of the manufacture of intoxicating liquor is covered by Entry 8 List II, therefore my lords, production of ENA(Extra Neutral Alcohol), which would be considered as a stage prior to the making of the Indian Made Foreign Liquor / potable alcohol (IMFL) or a beverage as the Centre may call it, is also covered by Entry 8 List II. Starting from Molasses, then to rectified spirit, then to ENA and then finally to IMFL, which is what is done in the case of consumable alcohol/ intoxicating liquor is covered by Entry 8 List II.”

Entry 8 List II gives State legislatures the power to regulate everything about creating and handling intoxicating liquor. This means from the very start of making the liquor to whatever comes after, it's all under this rule. This includes companies that make Extra Neutral Alcohol (ENA) but don't turn it into Indian Made Foreign Liquor (IMFL). This would also mean that businesses that start with raw materials like molasses or malt, make them into rectified spirits, and then sell them to others who make ENA, are covered. Every step leading up to the final IMFL product falls under Entry 8 List II, he argued.

“The legislative competence of the State Legislature in so far as Entry 8 List II is concerned would therefore deal with every stage related to the manufacture of an intoxicating liquor and even the stages thereafter. There are industries which manufacture only ENA but do not take it to the next stage of IMFL, they can sell to any other unit, that is also covered under Entry 8 List II. There are industries which procure molasses or malt, come to the stage of rectified spirit and then sell it to another unit which manufactures ENA….but every aspect of it would be covered by Entry 8 List II…..Every aspect of the process by which ultimately we get into the stage of IMFL would be covered by Entry 8 List II.”

The CJI then observed that the said argument of Mr Giri to include a raw material like ENA under the meaning of the production process of 'intoxicating liquor' would run contrary to the definition of 'industry' as laid down in the case of Tika Ramji. As per Mr Giri, the meaning of 'intoxicating liquor' would not just be limited to the production stage but also incorporate the raw materials used in the production.

“ Your argument on Entry 8 List II that production would cover every anterior including ENA (is a raw material in that sense of the matter), would then run contrary to the logic of Tika Ramji”

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 challenge to 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 (Unions powers over 'controlled industries' declared in public interest) . 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.

With regards to the Bench's earlier question of whether the decision of Tika Ramji was essential in deciding the present case,  Solicitor General (SG) Mr Tushar Mehta clarified that Tika Ramji was perhaps on a different footing than the present case. The SG jotted the following aspects : (1) The decision compares the two Acts relevant therein and holds that there is no repugnancy of the State's powers to legislate on the subject matter of sugar canes; (2) the finding of the Court regarding the meaning of the term industry to only mean production/ manufacturing stage is only an obiter ; (3) the decision doesn't dwell into the question of 'occupied field' neither rules that in the absence of a notified order by the Centre, the field is open for the States to regulate on the subject matter.

Rejoinder Arguements By The States

In his rejoinder submissions, Senior Advocate Mr Dinesh Dwivedi (for State of UP) emphasized the following: Firstly, to interpret the meaning of 'intoxicating liquor' under Entry 8 List II, one has to understand the intent of the framers of the Government of India Act 1935 which first introduced Entry 31 of List II which had then prescribed that the Provincial Legislature could pass any law concerning the production, manufacture, transport, purchase, possession and sale of intoxicating liquor. The said Entry 31 List II is presently in the form of Entry 8 List II of the Constitution; secondly, the judicial precedents of the Top court have held that when there is a conflict between the entries in List I and List II, the same should be reconciled harmoniously- “ It is only when no reconciliation is possible it is then that Parliamentary supremacy takes place” ;

Thirdly, none of the local Acts during the British Raj from which the basic understanding of liquor has been derived presently, make a clear distinction between industrial alcohol/ denatured spirit and potable alcohol and lastly, the required of a 'notified order' by the centre under S. 18 G of the IDR Act is a positive direction and cannot be defended by Union's earlier reliance on Doctrine of Forbearance. As per the said doctrine, the Union, by not enacting a notified order under a provision chooses to silently regulate on a subject. - “There has to be an indication, if the centre has to regulate by no regulation, it must pass an order and say so.”

It may be recalled that S.18 G of the IDR Act provides that the Union may by notification regulate post-production processes (supply, distribution, trade, commerce) of the alcohol industry.

A reiteration of earlier arguments was also made by several other Senior Advocates including Mr Arvind Datar (also for U.P) , Mr Balbir Singh (for Maharashtra), Mr Jaideep Gupta (for West Bengal) who expanded on their previous points in the rejoinder session.

The 9 judge constitution bench thereafter reserved its decision, after a thorough hearing of 6 long days on the issue of whether 'denatured spirit or industrial alcohol' can be brought within the meaning of 'intoxicating liquor' under State legislation's law-making powers.

Background

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”

The bench hearing the matter is led by CJI DY Chandrachud and comprises Justices Hrishikesh Roy, Abhay S. Oka, B.V. Nagarathna, J.B. Pardiwala, Manoj Misra, Ujjal Bhuyan, Satish Chandra Sharma And Augustine George Masih.

Case Details: STATE OF U.P. vs. M/S. LALTA PRASAD VAISH C.A. No. 000151 / 2007 & Other Connected Matters

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