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CASE NO.:

Appeal (civil) 3017 of 1997

Appeal (civil) 2696-2697 of 2003

PETITIONER:

State of Punjab and Anr.

RESPONDENT:

M/s. Devans Modern Brewaries and Anr.

DATE OF JUDGMENT: 20/11/2003

BENCH:

B.N. Agrawal

JUDGMENT:

J U D G M E N T

B.N. AGRAWAL,J.

The question involved in this batch of appeals, arising out of an order

of reference made by a three Judge Bench of this Court, is as to whether

Article 301 of the Constitution of India (hereinafter referred to as "the

Constitution") will have any application in relation to potable liquor the

business whereof is said to be res extra commercium; in view of the

decisions of this Court in Cooverjee B. Bharucha Vs. The Excise

Commissioner & The Chief Commissioner, Ajmer, & Ors., [(1954) SCR

873]; The State of Bombay Vs. R.M.D. Chambarbaugwala [(1957) SCR

874]; Har Shankar & Ors. Vs. The Deputy Excise & Taxation

Commissioner & Ors., [(1975) 1 SCC 737] and Khoday Distilleries Ltd.

& Ors., Vs. State of Karnataka & Ors. [(1995) 1 SCC 574].

These appeals arise out of judgements and orders passed by Punjab

and Haryana High Court and Kerala High Court. The State of Punjab

imposed tax on import of potable liquor manufactured in other States. The

State of Kerala also imposed a similar levy. The Punjab and Haryana High

Court by its judgment dated 17.01.1997 passed in Writ Petition (Civil) No.

5358 of 1996 quashed the notification dated 27.03.1996 imposing levy of

import duty by the State of Punjab in exercise of its powers conferred upon

it under Sections 31, 32 and 58 of the Punjab Excise Act, 1914 (hereinafter

referred to as "the Punjab Act') on two grounds viz.; (i) the State has no

power to levy such tax under the Punjab Act and (ii) in view of the

Constitution Bench decision of this Court in Kalyani Stores Vs. The State

of Orissa and others [1966(1) SCR 865], the imposition of duty is ultra

vires Article 301 of the Constitution.

So far as challenge to imposition of import duty on potable liquor by

the State of Kerala under Abkari Act, 1077 (hereinafter referred to as "the

Abkari Act") is concerned, the Kerala High Court has dismissed the writ

application on grounds, inter alia, that such duty, being regulatory in

nature, is not ultra vires the Abkari Act. The High Court did not enter into

the question of applicability of Article 301 of the Constitution vis-`-vis

effect of imposition of such import duty on potable liquor.

Mr. P.N.Misra, learned Senior Counsel appearing on behalf of the

appellant - State of Punjab in the Punjab matter having regard to several

provisions of the Punjab Act submitted that the High Court committed a

manifest error in holding that the State has no power to impose such a tax.

As regards applicability of Article 301 of the Constitution, the learned

counsel contended that as the State has the exclusive privilege to deal in

potable liquor in any manner it likes, it has the concomitant requisite power

to impose such tax by way of restriction on import. The learned counsel

further contended that as no trader can claim any fundamental right in

carrying on trade or business in potable liquor, question of applicability of

Article 301 of the Constitution would not arise. It may not be out of place to

mention that at the stage of reply Dr. A.M. Singhvi, learned Senior Counsel

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filed written submissions on behalf of the State of Punjab more or less

reiterating the contentions raised by Mr. P.N. Misra.

Mr. T.L.V. Iyer, the learned senior counsel appearing on behalf of

State of Kerala submitted that it is within the province of the State to

impose restrictions on import of potable liquor by imposing import duty.

According to learned counsel such a duty has not been imposed by the State

in exercise of its statutory power conferred upon it in terms of Entry 51, List

II of the Seventh Schedule to the Constitution but regulatory powers as

envisaged in Entry 8 thereof. In other words, Mr. Iyer contended that the

import duty has been levied not as a measure of tax but as a part of

regulation on the trade. The learned counsel further contended, although

such a stand has not been taken by the State before the High Court, but

having regard to the well-settled principle of law as laid down by this Court

and referred to hereinafter, the State can impose such duty as a price for

parting with its exclusive privilege.

In support of the contentions the learned senior counsel appearing for

the State of Punjab and that of Kerala relied upon the decisions of this Court

in the cases of Har Shankar (supra), Nashirwar and Others Vs. State of

Madhya Pradesh and Others (1975) 1 SCC 29, State of Orissa and

Others Vs. Harinarayan Jaiswal and Others (1972) 2 SCC 36, State

Bank of Haryana and Others Vs. Jage Ram and Others (1980) 3 SCC

599, State of Andhra Pradesh Vs. Y. Prabhakara Reddy (1987) 2 SCC

136, State of U.P. and Others Vs. Sheopat Rai and Others 1994 Suppl.

(1)SCC 8, State of Haryana and Others Vs. Lal Chand and Others

(1984) 3 SCC 634, State of Punjab Vs. M/s. Dial Chand Gian Chand and

Company (1983) 2 SCC 503, Solomon Antony and Others Vs. State of

Kerala and Others (2001) 3 SCC 694, Khoday Distilleries Ltd. and

Others (supra) and Government of Maharashtra and Ors. Vs. M/s.

Deokar's Distillery JT 2003 (3) SC 86.

Mr. Mohan Jain, learned counsel appearing on behalf of the

respondents-licensees of the State of Punjab and Mr. R.Venkataramani,

learned Senior Counsel, appearing on behalf of the intervenor, on the other

hand, contended that power to impose tax by the State of Punjab is

circumscribed by Sub-section 3 of Section 33A of the Punjab Act. It was

submitted that power to impose countervailing duty being statutorily

restricted, the State cannot be permitted to achieve the same object indirectly

by taking recourse to 'exclusive privilege' theory.

Mr. Ashok H. Desai and Mr. R.F. Nariman, learned senior counsel

appearing on behalf of the licensees - appellants in the Kerala matter raised

the following contentions:

(1) Levy of import duty having been expressly conferred by the

statute, the State cannot justify such a levy on the spacious ground

of having exclusive privilege of dealing in potable liquor.

(2) The State of Kerala having specifically raised a plea that such a

levy was justified by way of a fee and/or as a regulatory measure

cannot now turn round and contend that the levy was imposed by

way of a price for parting with the exclusive privilege of the State.

As the State of Kerala has not granted any licence to the

appellants, the question of parting of any privilege in their favour

does not arise. Pointing out to the admitted fact that Kerala State

Beverages Corporation has been granted the monopoly to deal in

liquor and the appellants and other traders having been selling

liquor to the Corporation, the question of rendition of any service

by the State of Kerala to the licensees so as to justify imposition of

a fee or regulatory tax therefor does not arise.

(3) Any fee regulating trade by grant of a licence would amount to

'tax' within the meaning of clause (28) of Article 366 of the

Constitution. Reliance in this connection has been placed on D.C.

Gouse & Co.etc. Vs. State of Kerala and Anr. etc. [1980(1) SCR

804] and Corporation of Calcutta and Anr., Vs. Liberty

Cinema [1965(2) SCR 477].

(4) The applicability of the doctrine of "res extra commercium" and/

or the concept of privilege theory on the part of the State would be

attracted only in a 'no right' situation. Once a right to trade has

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been conferred by the State, it cannot take umbrage under the

privilege doctrine. Even the State, at the time of grant of licence

by way of exclusive privilege, is bound by its own action, which in

a given case, may attract the wrath of Article 14 of the

Constitution. Reliance in this behalf has been placed on State of

M.P.& Ors., Vs. Nandlal Jaiswal & Ors., [1986(4) SCC 566].

(5) The Constitution Bench of this Court in Krishna Kumar Narula

Vs. The State of Jammu and Kashmir & Ors.1967(3) SCR 50

having clearly laid down that trade in liquor would come within

the purview of Article 19(1)(g) of the Constitution, the State can

only impose a reasonable restriction in terms of Clause (6) of

Article 19 thereof. In Khoday Distilleries Ltd. (supra), this Court

having clearly held that when a licence is granted, persons

similarly situated cannot be discriminated against which would

clearly lead to the conclusion that not only a fundamental right in

terms of Article 14 of the Constitution but also other constitutional

rights including those contained in Part XIII of the Constitution

are available in relation to trade in liquor.

(6) In Kalyani Stores (supra), H. Anraj Vs. Government of Tamil

Nadu (1986) 1 SCC 414 and State of Madhya Pradesh Vs.

Bhailal Bhai & Ors. 1964(6) SCR 261 this Court having clearly

held that Article 301 of the Constitution would be applicable also

in relation to obnoxious trade, there is no reason as to why the said

decisions shall be departed from.

(7) Keeping in view the decisions of this Court in Atiabari Tea

Company Limited Vs.The State of Assam & Ors., [1961(1) SCR

809] and The Automobile Transport (Rajasthan) Ltd. Vs. The

State of Rajasthan and Others [1963 (1) SCR 491] the purpose

of Article 301 of Constitution being to maintain economic unity

of the entire country, the State cannot by imposition of a tax

infringe upon the provisions contained in Part XIII of the

Constitution which is a self-contained part.

(8) The phraseology, used in Article 301 of the Constitution, namely,

trade, commerce and intercourse being of wide amplitude, the right

to carry on trade and business as envisaged in Article 19(1)(g) or

Article 298 of the Constitution cannot restrict the scope and ambit

thereof.

In view of the rival contentions, as noticed hereinbefore, the following

questions arise for consideration:

(i) Whether the impugned notifications issued by the State of Punjab

and that of Kerala are illegal being fraud on the Constitution.

(ii) Whether the import duty can be said to have been validly imposed

having regard to the doctrine of 'exclusive privilege' of the State to

deal in obnoxious matters?

(iii) Whether dealing in liquor which is said to be 'res extra

commercium' would nonetheless attract Part XIII of the

Constitution?

Re: Question (i)

The impugned notifications issued by the State of Punjab and that of

Kerala read as under:

I "Government of Punjab

Department of Excise and Taxation

NOTIFICATION

The 27th March, 1996

No. G.S.R. 28/P.A.I./14/Ss. 31, 32 and 58/Amd. (118)/96

In exercise of powers conferred by sections 31, 32

and 33 of the Punjab Excise Act, 1914 (Punjab Act 1 of

1914) and all other powers enabling him in this behalf,

the Governor of Punjab is pleased to make the following

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order, without previous publication, further to amend the

Punjab Excise Fiscal Orders, 1932, namely:-

ORDERS

1. (1) These orders may be called the Punjab

Excise Fiscal (Second Amendment) Orders, 1996.

(2) They shall come into force on and with

effect from the first day of April, 1996.

2. In the Punjab Excise Fiscal Orders, 1932

(hereinafter referred to as the said Orders),in order 1, in

the table, under column "Rate of duty per proof litre" -

(a) in item (1), against sub item (c) for the figures

"4.00" the figures "3.00" shall be substituted;

and

(b) in item (3) against sub-item (b) for the figures

"3.50" the figures "3.00" shall be substituted.

3. In the said Orders in order 1-B -

(a) for the words "rupees three" the words "rupees

two" shall be substituted; and

(b) for clause (iii) to the proviso, the following

clause shall be substituted namely:-

"(iii) the Indian Made Beer shall be at the rate of thirty-

eight paise per bulk litre."

4. In the said orders in order 1-D, for item (iii), the

following item shall be substituted namely:-

"(iii) rupees four and sixty paise per bulk litre."

II. "S.R.O. No. 330/96. In exercise of the powers conferred

by sections 6, 7, 17 and 18 of the Abkari Act, 1 of 1077

and in modification of notification issued under G.O. (p)

No. 24/94/TD dated 3rd March, 1994 and published as

S.R.O. No. 256/94 in the Kerala Gazette Extraordinary

No. 180 dated 3rd March, 1994, as subsequently

amended, the Government of Kerala hereby direct that

the import and export fees, the excise duty and luxury tax

under the said sections shall be levied on the following

kinds of liquors manufactured in the State and exported

outside the State under bond in force or manufactured

elsewhere in India and imported into the State by land,

air, or sea under bond, at the rates mentioned against

each kind of liquor.

The excise duty, import fee or luxury tax on liquor

manufactured elsewhere in India and imported into the

State by land, air or sea otherwise than under bond shall

be equal to the duty to which such liquor manufactured in

the State are liable under the Act such as import fee,

excise duty or luxury tax namely:-

Kind of Liquor

Rate of

excise duty

Rate of

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luxury

tax

Rate of

import fee

Rate of

export fee

1. Indian Made

Foreign Liquor

including beer

except those

consumed by

Defence Service.

(1) When exported

by distilleries/

Foreign Liquor

(compounding,

Blending and

(Bottling) Units/

Breweries to other

State and not

reimported into this

State, in cases where

the following terms

and conditions are

satisfied namely:-

Rs. 5

(Rupees five

only) per

proof litre in

the case of

Indian Made

Foreign

Liquor and

Rs. 2

(Rupees two

only) per

bulk litre in

the case of

beer

(i) The export is

under bond to cover

the duty at the rate

of an amount equal

to 200 per cent of

the value of Indian

Made Foreign

Liquor and

gallonage fee at the

rate of Rs. 3 per

bulk litre in the case

of beer.

(ii) No objection

certificate for import

certificate from the

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excise authorities of

the importing State

is produced by the

Distilleries/ Foreign

Liquor

(Compounding,

Blending and

Bottling) Units/

breweries.

(iii) Excise duty,

luxury tax and

export fee paid to

Kerala Government

before export.

(iv) The verification

certificate from the

Excise Authorities

of the importing

State is produced

before the Excise

officers in charge of

the Distilleries/

Foreign Liquor

(Compounding,

Blending and

Bottling) Units/

Breweries within 42

days of dispatch or

within such further

time as the Excise

Commissioner may

allow for sufficient

cause.

(v) The duty at the

rate of an amount

equal to 200 per cent

of the value of

Indian Made

Foreign Liquor and

gallonage fee at the

rate of Rs. 3 per

bulk litre in the case

of Beer is paid on all

quantities

unaccounted for;

and

(vi) Export is

through air, rail road

or ship.

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(2) in the case of:-

(a) Indian Made

Foreign liquor other

than beer imported

(bond or under

bond)

Rs. 5 per

proof litre

(b) Beer imported

(bond or under

bond)

Rs. 2 per

bulk litre

(c) wine imported

(duty paid or under

Bond)

Rs. 2 per

bulk litre

(3) In other cases:

(a) Indian Made

Foreign Liquor

(excluding beer and

wine)

An equal

amount to

100 per

cent of its

value

(b) Beer

Rs. 3 per

bulk litre

(c) Wine

Rs. 3 per

bulk litre

IV. Medicated wine

and similar

preparations but not

including

preparations on

which duty is

leviable under the

Medicinal and toilet

preparations (Excise

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Duties) Act, 1955

Rs. 12

(Rupees

twelve

only) per

proof litre

Published in K.G. Ex. No. 379 dt. 29.3.1997 as S.R.O.

No. 210/97

Explanation:-Where any liquor is chargeable with duty at

a rate depending on the value of the liquor, such value

shall be the value at which the Kerala State Beverages

(Manufacturing and Marketing) Corporation Ltd.,

purchases such liquor from the suppliers and in case any

such liquor is not purchased by the Kerala State

Beverages (Manufacturing and Marketing) Corporation,

such value shall be the value fixed by the Commissioner.

This notification shall come into force on 1st day of

April, 1996."

Before embarking upon the questions raised in these appeals, the

relevant provisions of the Punjab Act may be noticed which run thus:-

S.3.(9) "Excise revenue" means revenue derived or

derivable from any payment, duty fee, tax,

confiscation, or fine imposed or ordered under the

provisions of this Act, or of any other law for the

time being in force relating to liquor or

intoxicating drugs, but does not include a fine

imposed by a court of law.

S.3(12). "Import" (except in the phrase "import

into India") means to bring into Punjab and

Haryana otherwise than across a custom frontier as

defined by the Central Government.

S.16. Import, export and transport of intoxicants:-

No such intoxicant shall be imported, exported or

transported except -

(a) after payment of any duty to which it

may be liable under this Act or execution

of a bond for such payment, and

(b) in compliance with such condition as the

State Government may impose.

S.17. Power of State Government to prohibit

import, export and transport of intoxicants:- The

State Government may by notification:-

(a) prohibit the import or export of any

intoxicant into or from Punjab, Haryana

or any part thereof; or

(b) prohibit the transport of any intoxicant.

S.18. Pass necessary for import, export and

transport:- Except as otherwise provided by any

rule made under this Act, no intoxicants exceeding

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such quantity as the State Government may

prescribe by notification shall be imported or

transported except under a pass issued under the

provision of the next following section;

Provided that in the case of duty paid foreign

liquor such passes shall be dispensed with unless

the State Government shall by notification

otherwise direct;

Provided further, that no such conditions as may

be determined by the Financial Commissioner, a

pass granted under the excise law in force in

another State may be deemed to be a pass granted

under this Act.

S.19. Grant of passes for import, export and

transport:-Passes for the import, export and

transport of intoxicants may be granted by the

Collector.

Provided that passes for the import and export of

such intoxicant as the Financial Commissioner

may from time to time determine shall be granted

only by the Financial Commissioner.

S.31. Duty on excisable articles:- An excise duty

or a countervailing duty as the case may be at such

rate or rates as the State Government shall direct,

may be imposed either generally or for any

specified local area, on any excisable article.

(a) imported, exported or transported in

accordance with the provisions of section

16; or

(b) manufactured or cultivated under any

licence granted under section 23; or

(c) manufactured in any distillery established

or any distillery or brewery licensed under

section 21.

Provided as follows:-

(i) duty shall not to be so imposed on any

article which has been imported into

India and was liable on importation to

duty under the Indian Tariff Act, 1894, or

the Sea Customs Act, 1878.

Explanation:- Duty may be imposed under this

section at different rates according to the places to

which any excisable article is to be removed for

consumption, or according to the varying strength

and quality of such article.

S.32. Manner in which duty may be levied:-

Subject to such rules regulating the time, place and

manner as the Financial Commissioner may

prescribed such duty shall be levied rateably, on

the quantity of exciseable article imported,

exported, transported, collected or manufactured in

or issued from a distillery brewery or warehouse;

Provided that duty may be levied:-

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(a) on intoxicating drugs by an acreage rated

levied on the cultivation of the hemp plant

or by a rate charged on the quantity

collected.

(b) On spirit or beer manufactured in any

distillery established or any distillery or

brewery licensed, under this Act in

accordance with such scale of equivalents

calculated on the quantity of materials used

or by the degree of attenuation of the wash

or wort, as the case may be as the State

Government may prescribe.

(c) On tari, by a tax on each tree from which the

tari is drawn;

Provided further that, where payment is made upon

issue of an exciseable article for sale from a

warehouse established or licensed under section

22(a) it shall be made -

(a) If the State Government by notification

so directs, at the rate of duty which was

in force at the date of import of that

article; or

(b) In the absence of such direction by the

State Government, at the rate of duty

which is in force on that article on the

date when it is issued from the

warehouse.

S.33. Payment for grant of leases: - Instead of or in

addition to any duty leviable under this chapter the

State Government may accept payment of a sum in

consideration of the lease of any right under

section 27.

S.33-A. Saving for duties being levied at

commencement of the Constitution:- (1) Until

provision to the contrary is made by Parliament,

the State Government may continue to levy any

duty which it was lawfully levying immediately

before the commencement of the Constitution

under this Chapter as then in force.

(2) The duties to which this section applies are:-

(a) any duty on intoxicants which are not

exciseable articles within the meaning of

this Act; and

(b) any duty on exciseable article produced

outside India and imported into

Punjab/Haryana whether across a

customs frontier as defined by the

Central Government or not.

(3) Nothing in this section shall authorize the levy

by the State Government of any duty which as

between goods manufactured or produced in the

State and similar goods not so manufactured or

produced discriminates in favour of the former or

which in the case of goods manufactured or

produced outside the State discriminates between

goods manufactured or produced in one locality

and similar goods manufactured or produced in

another locality.

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S.34. Fees for terms, conditions and form of, and

duration of licences, permit and passes:-(1) Every

licence, permit or pass granted under this Act shall

be granted:-

(a) on payment of such fees, if any.

(b) Subject to such restrictions and on such

conditions,

(c) In such form and containing such

particulars,

(d) For such period,

as the Financial Commissioner may direct.

(2) Any authority granting a licence under this Act

may require the licensee to give such security for

the observance of the terms of his licence, or to

make such deposit in view of security, as such

authority may think fit.

S.58. Power of State Government to make Rules:

(1)....

(2) in particular and without prejudice to the

generality of the foregoing provision, the State

Government may make rules:-

(d) regulating the import, export, transport or

possession of any intoxicant or Excise bottle and

the transfer, price or use of any type or description

of such bottle.

(e) regulating the period and localities for

which and the persons or classes of

persons to whom licenses, permits and

passes for the vend by wholesale or by

retail of any intoxicants may be granted

and regulating the number of such

licences which may be granted in any

local area;

(f) prescribing the procedure to be followed

and the matters to be ascertained before

any licence is granted for the retail vend

for consumption on the premises.

S.59. Powers of Financial Commissioner to make

rules:- The Financial Commissioner may by

notification make rules:-

(d) prescribing the scale of fees or the manner

of fixing the fees, payable in respect of any

licence, permit or pass or in respect of the storing

of any intoxicant;

Apart from provisions of the Punjab Act, it would also be necessary to

notice Sections 17 and 18 of the Abkari Act occurring in Chapter V dealing

in "Duties, Taxes and Rentals" applicable in the State of Kerala which read

thus:

"17. Duty on liquor or intoxicating drugs:- A duty of

excise or luxury tax or both shall, if the Government so

direct, be levied on all liquor and intoxicating drugs:

(a) permitted to be imported under Section 6; or

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

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

(d) manufactured under any licence granted under

Section 12; or

(e) manufactured at any distillery, brewery, winery

or other manufactory established under Section

14; or

(f) issued from a distillery, brewery, winery or

other manufactory or warehouse licensed or

established under Section 12 or Section 14; or

(g) sold in any part of the State;

Provided that no duty or gallonage fee or vend fee or

other taxes shall be levied under this Act on rectified

spirit including absolute alcohol which is not intended to

be used for the manufacture of potable liquor meant for

human consumption.

Explanation:- For the purpose of this section and Section

18, the expression "duty of excise", with reference to

liquor or intoxicating drugs, include countervailing duty

on such goods manufactured or produced elsewhere in

India and brought into the State.

18. How duty may be imposed:- (1) Such duty of excise

may be levied:

(a) in the case of spirits or beer, either on the

quantity produced in or passed out of a

distillery, brewery or warehouse licensed or

established under Section 12 or Section 14 as

the case may be or in accordance with such

scale of equivalents, calculated on the quantity

of materials used or by the degree of

attenuation of the wash or wort or on the value

of the liquor as the case may be, as the

Government may prescribe;

(b) in the case of intoxicating drugs on the quantity

produced or manufactured or issued from a

warehouse licensed or established under

Section 14;

(c) xxx

(d) xxx

(e) in the case of toddy, or spirits manufactured

from toddy, in the form of a tax on each tree

from which toddy is drawn, to be paid in such

instalments and for such period as the

Government may direct; or

(f) by import, export or transport duties assessed in

such manner as the Government may direct; or

xxx

(2) The luxury tax on liquor or intoxicating drugs shall

be levied:-

(i) in the case of any liquor in the form of a fee for

licence for the sale of the liquor and in the form

of a gallonage fee or vending fee, or in any one

of such forms; and;

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(ii) in the case of an intoxicating drug, in the form

of a fee for licence for the sale of the

intoxicating drug.

(3) The duty of excise under sub-section (1) and the

luxury tax under sub-section (2) shall be levied at such

rates as may be fixed by the Government, from time to

time, by notification in the Gazette, not exceeding the

rates specified below:-

(1)

Duty of excise

Maximum rates

(i)

Duty of excise on liquors

(Indian made)

Rs. 200 per proof litre or an

amount equal to 200 per cent

of the value of the liquor.

(ii)

Duty of excise on

intoxicating drugs

Rs. 1 per gram or

Rs. 933.10 per seer.

(iii)

Duty of excise in the form

of tax on trees tapped for

toddy

Rs. 50 per tree per half-year

or part thereof

(2)

Luxury tax:

(a)

When levied in the form

of a fee for licence for sale

of foreign liquor -

(i)

For licence for sale of

foreign liquor in

wholesale

Rs. 15000 for a year or part

thereof

(ii)

For licence for sale of

foreign liquor in hotels or

restaurants

Rs. 12000 for a year or part

thereof

(iii)

For licence for sale of

medicated wines

Rs. 1000 for a year or part

thereof

(iv)

For licence for sale of

foreign liquor in non-

proprietory clubs to

members

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Rs. 1500 for a year or part

thereof

(v)

Xxx

(b)

When levied in the form

of gallonage fee

Rs. 10 per bulk litre or

Rs. 45.46 per bulk gallon

(c)

When levied in the form

of a fee for licence for the

sale of foreign liquor

(Foreign made)

(i)

In wholesale

Rs. 25,00,000 (Rupees

Twenty Five lakhs) for a year

or part thereof

(ii)

In retail

Rs. 10,00,000 (Rupees Ten

lakhs) for a year or part

thereof

(iii)

In hotels or restaurants

Rs. 25,00,000 (Rupees

Twenty Five lakhs )for a year

or part thereof

(iv)

In non-proprietory clubs

to its members

Rs. 10,00,000 (Rupees Ten

lakhs) for a year or part

thereof

(v)

In Seamen's and Marine

Officer's clubs to its

members

Rs. 10,00,000 (Rupees Ten

lakhs) for a year or part

thereof

(d)

When levied in the form

of gallonage fee

(i)

Foreign Liquor (Foreign

made) other than beer and

wine

Rs. 200 (Rupees Two

hundred) per bulk litre

(ii)

For foreign made beer and

wine

Rs. 25 (Rupees Twenty Five)

per bulk litre

Provided that where there is a difference of duty of

excise or luxury tax as between two licence

periods, such difference may be collected in

respect of all stocks of Indian made foreign liquor

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or intoxicating drugs held by licensees at the close

of the former period.

Note: The expression 'Foreign Liquor (Foreign

made) means any liquor produced, manufactured,

or blended and compounded abroad and imported

into India by land, air or sea.

Explanation:- Where any liquor is chargeable with

duty at a rate depending on the value of the liquor,

such value shall be the value at which the Kerala

State Beverages (Manufacturing and Marketing)

Corporation Limited purchases such liquor from

the suppliers and in case any such liquor is not

purchased by Kerala State Beverages

(Manufacturing and Marketing) Corporation

limited such value shall be the value fixed by the

Commissioner."

Provision to grant licence is contained in Chapter VI of the Abkari

Act, Section 24 whereof is as under:

"24. Forms and conditions of licenses, etc:-Every license

or permit granted under this Act shall be granted:-

(a) on payment of such fees, if any;

(b) for such period;

(c) subject to such restrictions and on such

conditions; and

(d) shall be in such form and contain particulars -

as the Government may direct either generally,

or in any particular instance in this behalf."

The State of Kerala raised a contention that the imposition of levy is

referable to Entry 66 of List II of the Seventh Schedule to the Constitution.

An additional affidavit was filed before the Kerala High Court wherein it

was averred that such a levy has been imposed also by way of a regulatory

fee. No plea whatsoever has been raised that such a levy is towards a price

or a part of price for parting with exclusive privilege. The High Court

accepted plea of the State that the levy is by way of regulatory fee in

relation whereto doctrine of 'quid pro quo' has no application.

Before the High Court of Punjab and Haryana although a plea was

raised that the impost was by way of a price for parting with the exclusive

privilege but in its impugned judgment the High Court rejected the same

having regard to the provisions contained in Section 33A of the Punjab Act.

The Excise Acts referred to hereinbefore seek to regulate trade and

business in liquor. They have their origin before coming into force of the

Government of India Act, 1935 or the Constitution and, thus, being pre-

constitutional laws, validity thereof and/or any statutory impost levied

thereunder would be subject to Articles 372 and 305 of the Constitution vis-

`-vis Article 13 thereof. The statutory rights and obligations created by

reason of the aforementioned Acts, after coming into force of the

Constitution, would, therefore, be subject to the extent saved by the

Constitution itself and, thus, the provisions thereof, the rules made

thereunder and actions taken must conform to the limitations imposed

thereby. The said Acts, therefore, must be construed keeping in view Entries

8 and 51 of List II of the Seventh Schedule to the Constitution. Before

dealing with the matter further, it may be noticed that in the instant case I am

not concerned with validity or the interpretation of a pre-constitutional law

but a post-constitutional one. The impugned levy, therefore, must be

justified having regard to the relevant entries made in List II of the Seventh

Schedule to the Constitution. Section 6 of the Abkari Act permits import of

liquor on payment of duties, taxes, fees and such other sums as are due to the

Government and Section 7 thereof provides for export. Section 17 provides

for levy of a duty of excise or luxury tax or both on liquor permitted to be

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imported under Section 6 thereof. Section 18 deals with the manner in

which such duty should be imposed. Sections 31 and 32 of the Punjab Act

are in pari materia with Section 17 and Section 18 respectively of the Abkari

Act.

A question arises as to what is "excise duty". An excise duty can be

imposed on manufacturer of goods only in terms of statute made by the

Parliament. An exception thereto has been made in the case of liquor in

terms whereof the State Legislature has been empowered to levy excise duty

by reason of Entries 8 and 51 of List II of the Seventh Schedule to the

Constitution which read thus:

"Entry 8: Intoxicating liquors, that is to say, the

production, manufacture, possession, transport,

purchase and sale of intoxicating liquors.

Entry 51. Duties of excise on the following goods

manufactured or produced in the State and

countervailing 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."

Legislative competence of the State to levy any fee is, therefore,

limited to levy of countervailing duty. In other words, any levy on import

can not exceed the excise duty levied on the manufacturers of the State. The

State, therefore, cannot levy any duty in addition to the countervailing duty.

The notification refers to excise duty and countervailing duty, which in

terms of Section 3(6-B) of the Punjab Act mean any such excise duty or

countervailing duty as the case may be, as is mentioned in Entry 51 of List II

of the Seventh Schedule to the Constitution. The State, therefore, cannot

levy any import fee over and above the excise duty/countervailing duty,

having regard to the said definition. Sections 17 and 18 of the Abkari Act,

which are in pari materia with Sections 31 and 32 of the Punjab Act, are

referable to Entry 51 alone. As Entry 51 puts an embargo on the State to

make a legislation, there cannot be any gainsaying that any levy in terms of

Sections 17 and 18 of the Abkari Act would be subject thereto.

Can the levy be said to be valid if thereby regulatory licencee fees

have been imposed? The answer to the said question must be rendered in

the negative.

Clause (28) of Article 366 reads as under:

"taxation" includes the imposition of any tax or

impost, whether general or local or special, and

"tax" shall be construed accordingly;

A regulatory impost would, thus, come within the purview of the tax.

A fee in terms of the constitutional schemes may be either a regulatory

licence fees or a fee in lieu of rendition of service. When no service is

rendered a fee can be justified only by way of licence fees. Such impost,

however, would be a tax and, thus, would clearly be referable to Entry 51 of

List II to the Constitution and not Entry 66 thereof. (See Liberty Cinema

(supra), D.C. Gouse & Co. (supra) and Hindustan Times & Ors., Vs.

State of U.P. and Anr., JT 2002 (9) SC 317).

Indisputably, the State while imposing import duty has exercised its

power under the statute. The impugned notifications in no uncertain terms

and unequivocally refer to the source of power therefor. The functions of

the State to impose a fee or tax in terms of the provisions of the statute is a

legislative function. Such legislative function must be attributed to the

source of the State's power in terms of Entry 51 of List II to the Constitution

and not otherwise. If the legislations in question are found to be

unreasonable in nature or fraud on the Constitution, would it still be

permissible for the State to turn round and contend that such imposts are not

being levied in exercise of its taxation power but attributable to its

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regulatory power? In other words, can the State turn round and contend that

what it sought to do was not in terms of legislative function but merely by

way of executive action? Answer to the said question again must be

rendered in the negative. It is a well-settled principle of law that a thing

which cannot be done directly cannot be done indirectly. (See Priyanka

Overseas Pvt. Ltd. and Another Vs. Union of India and Others, 1991

Supp (1) SCC 102). In relation to an administrative act, it is well-settled

that a statutory authority is not permitted to support its decision on a ground

d'hors the ground stated in the order. (See Commissioner of Police,

Bombay Vs. Gordhandas Bhanji, AIR 1952 SC 16 and Mohinder Singh

Gill and another Vs. The Chief Election Commissioner, New Delhi and

others, AIR 1978 SC 851). On the same analogy, a legislation which is

found to be fraud on the Constitution, cannot, inter alia, be upheld on any

other ground. Entry 8 of List II of the Seventh Schedule to the Constitution

does not permit the State to levy a fee on import of liquor. It deals only with

production, manufacture, possession, transport, purchase and sale of

intoxicating liquors and nothing else. Entry 8 of List II, thus, does not

speak of import or export. Its purpose is to regulate and not impose any

statutory impost. The State in exercise of its delegated powers cannot do

what would constitutionally be impermissible.

A subsidiary question which arises for consideration is as to whether

the State of Punjab, having regard to Section 33A of the Punjab Act, could

levy such duty. In Sub-Section (1) of Section 33A provision has been made

permitting the State to continue to levy any duty which it had lawfully been

levying immediately before the commencement of the Constitution. The

said provision is in tune with Article 305 of the Constitution, therefore, the

same calls for a strict construction. Sub-section (3) of Section 33A is

couched in negative language by reason whereof power of the State to levy

any duty has been taken away in the event thereby any discrimination is

made in favour of goods manufactured or produced in the State and similar

goods manufactured or produced in another locality. Clearly such a

provision is in consonance with Article 304 of the Constitution. If by reason

of a statute an embargo has been placed on the State's power to levy any fee,

it is beyond any cavil of doubt that such a levy cannot be held to be justified

by reason of an executive action or otherwise.

It is trite that even a term of the contract cannot be in violation of an

express provision contained in a statute. By reason of provisions of the

Abkari Act or the Punjab Act, no power has been conferred upon the State

to impose any import fee over and above the excise duty/countervailing

duty. It is not disputed that such countervailing duty has been levied and the

licensees pay the same. The power to levy fee and the power to grant

licences, permits and passes occur in different chapters of the Acts. The

powers under different chapters are required to be exercised for different

purposes. One is legislative in character and the other refers to executive

action. Furthermore, under the Punjab Act fees for grant of licences,

permits and passes are required to be paid on the terms as the Financial

Commissioner may direct. Having regard to the fact that the Financial

Commissioner is the statutory authority in relation thereto, the State cannot

be said to have any jurisdiction thereover, particularly, in the matter of levy

of import fee which clearly is referable to Chapter V of the Punjab Act and

has nothing to do with grant of licence occurring in Chapter VI.

The matter may be considered from another angle. Having regard to

Article 265 of the Constitution a tax must be imposed by a statute. Even

such impost is impermissible by any bye-law or rule. (See Bimal Chandra

Banerjee Vs. State of Madhya Pradesh etc., (1970) 2 SCC 467; A

Venkata Subba Rao Vs. State of Andhra Pradesh, (1965) 2 SCR 577 and

Attorney General Vs. Wilts United Dairies (1922) 91 Law Journal, KB

897.

In Synthetics and Chemicals Limited & Ors., Vs. State of UP and

Others (1990) 1 SCC 109 at page 158, a Seven-Judge Bench of this Court

has equated excise duty with the price for privileges. In the matter of

interpretation of Constitution, the said decision has been referred to with

approval in Welfare Assocn. A.R.P., Maharashtra & Anr. Vs. Ranjit P.

Gohil & Ors. [JT 2003 (2) SC 335]. In the said seven Judge Bench

decision, this Court observed thus:

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"On an analysis of the various Abkari Acts and

Excise Acts, it appears that various

provinces/States reserve to themselves in their

respective States the right to transfer exclusive or

other privileges only in respect of manufacture and

sale of alcohol and not in respect of possession and

use. Not all but some of the States have provided

such reservation in their favour. The price charged

as a consideration for the grant of exclusive and

other privileges was generally regarded as an

excise duty. In other words, excise duty and price

for privileges were regarded as one and the same

thing. So-called privilege was reserved by the State

mostly in respect of country liquor and not foreign

liquor which included denatured spirit."

In view of the foregoing discussions, I am of the opinion that the

impugned levy cannot be sustained.

Re: Questions (ii) and (iii)

What is Res-Extra-Commercium:

In Black's Law Dictionary, Fifth Edition, 'Res' has been defined as

follows:

"By "res", according to the modern civilians, is

meant everything that may form an object of

rights, in opposition to "persona," which is

regarded as a subject of rights. "Res", therefore, in

its general meaning, comprises actions of all kinds;

while in its restricted sense it comprehends every

object of right, except actions."

In Trayner's Latin Maxims, Fourth Edition, 'Extra Commercium' is

stated as "Beyond Commerce. This is said of things which cannot be bought

or sold, such as public roads, rivers, titles of honour, etc."

In Words and Phrases, Volume 15 A, it has been stated:

"Property once dedicated to public use is "extra

commercia", and inalienable by seizure and sale

under execution against a municipal corporation,

unless it is made affirmatively and clearly to

appear that its use had been abandoned or lost by

nonuser."

In Bouvier's Law Dictionary, Volume I, Third Edition, at page 531,

it is stated:

"It has been frequently said by the Supreme Court

that commerce includes intercourse, though

usually the term is qualified as "commercial

intercourse"; Gibbons v. Ogden, 9 Wheat. (U.S.) 1,

6 L.Ed 23; U.S. v. E.C. Knight Co., 156 U.S. 1, 15

Sup. Ct. 249, 39 L. Ed. 325; Welton v. Missouri,

91 U.S. 275, 280, 23 L.Ed. 347; Pensacola

Telegraph Co. v. Western Telegraph Co., 96 U.S.

1, 9, 24 L.Ed. 708; Mobile County v. Kimball, 102

U.S. 691, 702, 26 L.Ed. 238 (where the phrase is

"intercourse and traffic"); Addyston Pipe & Steel

Co. v. U.S., 175 U.S. 211, 241, 20 Sup. Ct. 96, 44

L.Ed. 136; Lindsay & P. Co. V. Mullen 176 U.S.

126, 20 Sup. Ct. 325, 44 L.Ed.400; Interstate

Commerce Commission v. Brimson, 154 U.S. 447,

470, 14 Sup Ct. 1125, 38 L.Ed. 1047; Lottery

Case, 188 U.S. 321, 346, 23 Sup. Ct. 321, 47 L.Ed.

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492. The first expression of this was by Marshall,

C.J., in Gibbons v. Ogden, 9 Wheat (U.S.) 1, 6

L.Ed. 23; quoted by Fuller, C.J., in U.S. v. Knight

Co., 156 U.S. 1, 15 Sup. Ct. 249, 39 L.Ed. 325;

and characterized by White, J., as a "luminous

definition" in Northern Securities Co. v. U.S., 193

U.S. 197, 24 Sup. Ct. 436, 48 L.Ed. 679, to the

effect that commerce is something more than

traffic; "It is intercourse; it describes the

commercial intercourse between nations and parts

of nations in all its branches, and is regulated by

prescribing rules for carrying on that intercourse."

This has been practically, if not literally, quoted in

all the cases cited. There is nothing in the

decisions to define or limit so broad a term as

intercourse, except the word commercial, usually

attached to it. As it is hardly likely that the courts

intended to say that commerce is intercourse in the

sense in which it is defined "communication

between persons or places"; Cent. Dict.: it is

probable that the word was not intended to be used

to express more than such intercourse as is

connected with traffic and transportation with

foreign countries or between the States."

Dealing in liquor or for that matter in lottery, tobacco is not prohibited

under the Constitution. On the other hand, in the constitutional schemes

itself Parliament or the State Legislature has been conferred power to

regulate the said trade like any other trade. In fact India has entered into

trade agreements to deal in liquor with other sovereign countries. India has

entered into International treaties in the matter of foreign investment in

liquor. Trade in liquor finds place in World Trade Organization (WTO) and

General Agreement on Trade and Tariff (GATT). In terms of the WTO and

GATT guidelines have been laid down as regards import and export of

potable liquor. India, as a signatory to WTO and GATT, is expected to

follow the said guidelines. It is expected to remove all trade barriers subject

to the other provisions contained therein. It is also supposed to levy taxes/

countervailing duties in terms of such international treaties.

No constitutional provision or statute prohibits trade in liquor. Article 47 of

the Constitution empowers the State to impose prohibition. Once a

prohibition is imposed by any State in exercise of said powers, indisputably

no person will have any right to deal in potable liquor.

Applicability of Res-extra commercium is a judge made law.

Constitution does not provide for it. Even if Entries 8, 51 and 54 of List II,

on the other hand, lead to the conclusion that the State has the legislative

power to make regulatory enactment in the spheres provided for them, the

State indisputably may exercise its right to prohibit dealings in liquor either

wholly or partially but if it allows trade and business in liquor by parting

with its exclusive privilege; a presumption will arise unless contrary

intention is shown in the statute or licence granted therefor that it has not

retained unto itself a right to deal with a part of the trade itself or through its

agency. As has been noticed in the Kerala matter the State has given the

monopoly to trade in liquor in favour of the Kerala State Beverages

Corporation. Nowhere it is stated either by way of counter-affidavit or

under the statute that the State has reserved unto itself any right in the matter

relating to carrying on trade or business in potable liquor. As soon as a

licence is granted upon receipt of a fee fixed by it, the State would be

presumed to part with its entire privilege. To say that while exercising its

regulatory power for the purpose of controlling the trade and business in

potable liquor, it has reserved unto itself a part of its exclusive privilege

would not be correct unless the same is explicitly pleaded and proved.

Regulatory measures in the matter of trade and business in potable

liquor have been taken by reason of a statute. All regulations on the trade,

thus, must be governed by the statutes operating in the field and not by way

of executive action. The provisions of the statute or the contracts made

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thereunder must scrupulously be followed by all concerned as they are

bound by the same. When a legislation referable to Entries 8, 51 and 66 etc.

had occupied the field, the State, in absence of any provision contained in

the statute, cannot turn round and contend that it will exercise its power of

exclusive privilege even though it had granted licence in terms of the statute.

Having regard to the constitutional scheme the power of the State to

undertake trade and business is referable to Article 298 of the Constitution.

The duties, functions and responsibilities of a Government in a democracy

are different from monarchism. Rights and privileges of a monarch cannot

be equated with an elected Government in a democratic set-up. If the power

of the Government in other words to deal in trade or commerce, be it liquor

or any other commodity, can only be traced to Article 298 of the

Constitution, it goes without saying that the same would be subject to all

constitutional limitations applicable in relation thereto. The State while

exercising its constitutional power under Article 298 of the Constitution

cannot itself be an extra constitutional authority so as to violate the

constitutional provisions. It like any other trader must confine itself within

the four corners of the statutes governing the field which are enacted in

terms of one entry or the other made in any of the three lists to the Seventh

Schedule of the Constitution.

A State, therefore, may be entitled to either completely prohibit a

trade or business in liquor and create monopoly either in itself or in any

other agency and furthermore it can for the purpose of selling the licence

adopt any mode with a view to maximize its revenue but while doing so it

must, having regard to a large number of decisions of this Court, not act

arbitrarily. The State while carrying on business by way of parting with its

privilege or distribution of largess must conform to the equality clause

enshrined in Article 14 of the Constitution. It has been so held in Nandlal

Jaiswal (supra) at pages 604-605 in the following terms:

"But, before we do so, we may at this stage

conveniently refer to a contention of a preliminary

nature advanced on behalf of the State

Government and respondents 5 to 11 against the

applicability of Article 14 in a case dealing with

the grant of liquor licences. The contention was

that trade or business in liquor is so inherently

pernicious that no one can claim any fundamental

right in respect of it and Article 14 cannot

therefore be invoked by the petitioners. Now, it is

true, and it is well settled by several decisions of

this Court including the decision in Har Shanker v.

Deputy Excise & Taxation Commissioner [(1975)

3 SCR 254 : (1975) 1 SCC 737 : AIR 1975 SC

1121] that there is no fundamental right in a citizen

to carry on trade or business in liquor. The State

under its regulatory power has the power to

prohibit absolutely every form of activity in

relation to intoxicants - its manufacture, storage,

export, import, sale and possession. No one can

claim as against the State the right to carry on trade

or business in liquor and the State cannot be

compelled to part with its exclusive right or

privilege of manufacturing and selling liquor. But

when the State decides to grant such right or

privilege to others the State cannot escape the

rigour of Article 14. It cannot act arbitrarily or at

its sweet will. It must comply with the equality

clause while granting the exclusive right or

privilege of manufacturing or selling liquor. It is,

therefore, not possible to uphold the contention of

the State Government and respondents 5 to 11 that

Article 14 can have no application in a case where

the licence to manufacture or sell liquor is being

granted by the State Government. The State cannot

ride roughshod over the requirement of that

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article."

Privilege, thus, can be claimed by a State in a 'no right' situation,

namely, when citizen is not permitted to carry on trade. But once the State

takes a decision to part with its privilege, it cannot make any discrimination

whatsoever. Dealing in liquor by the persons in whose favour licences have

been granted in terms of the statutory enactments derive a right therefor

which cannot be said to be "Res-Extra Commercium"

Now comes the question as to how far and to what extent, if any, the

fundamental and other rights of a citizen could be available in the matter of

trade in potable liquor. Article 19(1)(g) guarantees that all citizens shall have

the right to practice any profession or to carry on any occupation, trade or

business. However, in terms of Article 19(6) this right can be restricted by a

statute imposing reasonable restrictions. A combined reading of clauses (1)

and (6) of Article 19 makes it clear that a citizen has a fundamental right to

carry on any trade or business and the State can make a law imposing

reasonable restrictions on the said right in the interest of the general public.

It is, therefore, obvious that unless dealing in liquor is excluded from `trade

or business', a citizen has a fundamental right to deal in that commodity.

This right was recognized in the The State of Bombay and Another

Vs. F.N. Balsara [(1951) SCR 682] where Fazl Ali, J., observed at page 717

that "we hold that to the extent to which the prohibition Act prevents the

possession, use and consumption of non-beverages and medicinal and toilet

preparations containing alcohol for legitimate purposes the provisions are

void as offending against Art. 19(1)(f) of the Constitution even if they may

be within the legislative competence of the provincial legislature,"

But in Cooverjee B. Bharucha (supra) a Constitution Bench of this

Court held that there is no inherent right in a citizen to sell intoxicating

liquors. This decision was rendered relying on P.Crowley, Chief of Police

of the City and County of San Fancisco, California Vs. Henry

Christenses [(1890) 34 Law. Ed.620(A)].

However, this exclusive privilege theory was rejected by a

Constitution Bench of this Court in Saghir Ahmad & Anr. Vs. State of

U.P. & Ors. [AIR 1954 SC 728] stating that this doctrine has no place

under Indian Constitution. It was observed that establishment of a

monopoly does not create a reasonable restriction. The observations made

in Cooverjee B. Bharucha (supra) stating that the general observations

occurring in the judgment have to be taken with reference to the facts of that

case were duly explained. It was reiterated that the State has a right to

prohibit trade which is illegal or immoral or injurious to the health and

welfare of the public by taking recourse to regulating legislation

contemplated by Article 19(6).

The fundamental right to trade in intoxicant liquor was recognized in

State of Kerala & Ors. Vs. P.J. Joseph [AIR 1958 SC 296]. There the

Government of Travancore and Cochin imposed 20% commission for

sanction of extra quota of Foreign Liquor to wholesale licencees. The said

impost was challenged before the High Court of Judicature for Travancore

Cochin, which was struck down by said High Court. On Appeal by State

this Court while upholding the judgment of High Court observed "an impost

not authorised by law cannot possibly be regarded as a reasonable restriction

and must, therefore, always infringe the right of the respondent to carry on

his business which is guaranteed to him by Article 19(1)(g) of the

Constitution." It was held that an impost in terms of an executive order

having no authority of law would be illegal imposition.

This principle has been affirmed by a Constitution Bench of this Court

in Krishna Kumar Narula Vs.State of Jammu and Kashmir & Ors.,

1967(3) SCR 50. After discussing all previous decisions, Subba Rao, C.J.,

held that "a scrutiny of these decisions does not support the contention that

the court held that dealing in liquor was not business or trade. They were

only considering the provisions of the various Acts which conferred a

restricted right to do business. None of them held that a right to do business

in liquor was not a fundamental right". It was observed that "If the activity

of a dealer, say, in ghee is business; then how does it cease to be business if

it is in liquor. Liquor can be manufactured, brought or sold like any other

commodity. It is consumed throughout the World though some countries

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restrict or prohibit the same on economic or moral grounds". It was further

held that "dealing in liquor is business and a citizen has a right to do

business in that commodity; but the State can make a law imposing

reasonable restrictions on the said right, in public interests."

In R.M.D. Chamarbaugwala(supra) S.R. Das, C.J. observed that the

American Congress have no power to control gambling and like spurious

transactions under its power over 'inter-State commerce' if they were not

held to be 'commerce'.

Even in Har Shankar (supra) Chandrachud, J. (as the learned Chief

Justice then was) held that the right to trade in liquor is not absolute and it is

to be treated as a separate class. But therein also it has not been held that

despite fulfilling the regulatory measures, the trade would be illegal. The

point that arose for consideration therein was the State's power to prohibit

trade. In that case, this Court had no occasion to consider the question

involved in the present one.

A large number of decisions, as noticed hereinbefore, have been cited

at the Bar for the proposition that by reason of grant of licence, the licensee

is merely granted a permissive privilege subject to the degree of regulatory

control as may be deemed necessary and appropriate having regard to the

fact that nobody has any constitutional right to trade in liquor in view of its

inherently pernicious and noxious nature. I may deal with some of the

decisions cited at the bar a little later but the principles which emerge from

the various decisions of this Court and particularly by Constitution Benches

of this Court are:

(i) Trade in liquor is against public morality and thus res extra

commercium. No citizen has any Fundamental Right to carry on

business in liquor. [See R.M.D. Chambarbaugwala (supra)]. As

there does not exist any right to carry on trade, Article 301 shall

not apply.

(ii) Right to trade in liquor is a Fundamental Right within the meaning

of Article 19(1)(g) of the Constitution subject, of course, to the

reasonable restrictions in terms of Clause (6) of Article 19. [See

Krishna Kumar Narula (supra)]

(iii) Right of the State to deal exclusively in liquor is its own privilege.

It does not matter as to whether such right is restricted while

parting with privilege by reason of a statute in terms of Article

19(6) of the Constitution.

(iv) (a) The equality clause even in the matter of carrying on trade is

not available. The right of the State to part with its privilege being

a superior right, the inferior right of a citizen to carry on trade,

shall give way to State's superior right.

(b) The State while carrying on any trade or business itself cannot

make any discrimination and its acts must be fair and reasonable.

[See Nandlal Jaiswal (supra)]

(v) The State's right is absolute when a complete prohibition is

imposed and at that stage the State can part with its exclusive

privilege in any manner it likes and it is also entitled to take any

measures for having the best price. [See Har Shankar (supra)].

In Khoday Distilleries Ltd. (supra) at pages 608-609, a Constitution

Bench referred to some of the decisions as referred to hereinbefore and

summed up its findings [para 60(a)(b)(e)(f)(g)]:

"(a) The rights protected by art. 19(1) are not

absolute but qualified. The qualifications are stated

in cls. (2) to (6) of art. 19. The fundamental rights

guaranteed in art. 19(1)(a) to (g) are, therefore, to

be read along with the said qualifications. Even the

rights guaranteed under the Constitutions of the

other civilized countries are not absolute but are

read subject to the implied limitations on them.

Those implied limitations are made explicit by cls.

(2) to (6) of art. 19 of our Constitution.

(b) The right to practise any profession or to carry

on any occupation, trade or business does not

extend to practising a profession or carrying on an

occupation, trade or business which is inherently

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vicious and pernicious, and is condemned by all

civilised societies. It does not entitle citizens to

carry on trade or business in activities which are

immoral and criminal and in articles or goods

which are obnoxious and injurious to health, safety

and welfare of the general public, i.e., res extra

commercium, (outside commerce). There cannot

be business in crime.

(e) For the same reason, the State can create a

monopoly either in itself or in the agency created

by it for the manufacture, possession, sale and

distribution of the liquor as a beverage and also

sell the licences to the citizens for the said purpose

by charging fees. This can be done under art. 19(6)

or even otherwise.

(f) For the same reason, again, the State can

impose limitations and restrictions on the trade or

business in potable liquor as a beverage which

restrictions are in nature different from those

imposed on the trade or business in legitimate

activities and goods and articles which are res

commercium. The restrictions and limitations on

the trade or business in potable liquor can again be

both under art. 19(6) or otherwise. The restrictions

and limitations can extend to the State carrying on

the trade or business itself to the exclusion of and

elimination of others and/or to preserving to itself

the right to sell licences to do trade or business in

the same, to others.

(g) When the State permits trade or business in the

potable liquor with or without limitation, the

citizen has the right to carry on trade or business

subject to the limitations, if any, and the State

cannot make discrimination between the citizens

who are qualified to carry on the trade or

business."

The decisions of this Court including those rendered by the

Constitution Benches struck different notes. They at times stand poles apart.

Inconsistencies and contradictions in the said decisions are galore. Some

latter Constitution Bench decisions although took note of the earlier

Constitution Bench decisions, but only sought to distinguish the same and

not referred the matter to a larger Bench for consideration of correctness of

one view or the other. I may, therefore, proceed on the premise that some of

the principles in Khoday (supra) are correct, although one may have strong

reservations even in this behalf. In Khoday (supra) expressly or by

necessary implication fundamental right to deal in any goods is accepted.

Only exception which was made are those commodities, business of which

is inherently noxious and pernicious and is condemned by the civilized

society. It has sought to lay down the law that there cannot be a business in

crime.

Dealing in a commodity which is governed by a statute cannot be said

to be inherently noxious and pernicious. A society cannot condemn a

business nor there exists a presumption in this behalf if such business is

permitted to be carried out under statutory enactments made by the

legislature competent therefor. The legislature being the final arbiter as to

the morality or otherwise of the civilized society has also to state as to

business in which article (s) would be criminal in nature. The society will

have no say in the matter. The society might have a say in the matter which

could have been considered in a Court of law only under common law right

and not when the rights and obligations flow out of statutes operating in the

field. Health, safety and welfare of the general public may again be a matter

for the legislature to define and prohibit or regulate by legislative

enactments. Regulatory statutes are enacted in conformity with clause (6) of

Article 19 of the Constitution to deal with those trades also which are

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inherently noxious and pernicious in nature and furthermore thereby

sufficient measures are to be taken in relation to health, safety and welfare of

the general public. The courts while interpreting a statute would not take

recourse to such interpretation whereby a person can be said to have

committed a crime although the same is not a crime in terms of the statutory

enactment. Whether dealing in a commodity by a person constitutes a crime

or not can only be subject matter of a statutory enactment.

The Excise Acts enacted by the States mandate the licensees to carry

on their activities in terms of the conditions of licence and the provisions

contained therein. So long as the business activities of the licensees are

within the four-corners of the conditions of the licence and the provisions of

the Licensing Act, they, without any obstruction whatsoever, are entitled to

carry on their trade, business or commerce. They would be liable to be

proceeded against for commission of an offence only in the event they

violate the statutory provisions wherefor the statute itself provides for

imposition of penalty.

Thus, when a person has been granted a licence strictly in conformity

with the Excise Act to carry on his business activities in terms of the statute

operating in the field, the same can neither be termed as pernicious,

obnoxious and injurious to health, safety and welfare of the general public.

No public interest can be inferred by any court of law by going beyond the

statutory provisions. Even monopoly of the State either in itself or in any

agency created by it for manufacture, possession, sale and distribution of

liquor can be created only by a statute which must conform to the

provisions of clause (6) of Article 19 of the Constitution, i.e., by making a

valid law, by way of a regulatory legislative enactment.

From the analysis of decisions rendered by this Court in Cooverjee B.

Bharucha, R.M.D. Chambarbaugwala, Har Shankar or Khoday Distilleries, it

will appear that a person cannot claim any right to deal in any obnoxious

substance on the ground of public morality. The State, therefore, is entitled

to completely prohibit any trade or commerce in potable liquor. Such

prohibition, however, has not been imposed. Once a licence is granted to

carry on any trade or business can it be said that a person is committing a

crime in carrying on business in liquor although he strictly complies with the

terms and conditions of licence and the provisions of the statute operating in

the field? If the answer to the said question is to be rendered in affirmative

it will create havoc and lead to anarchy and judicial vagaries. When it is not

a crime to carry on such business having regard to the fact that a person has

been permitted to do so by the State in compliance with the provisions of the

existing laws, indisputably he acquires a right to carry on business. Even in

respect to trade in food articles or other essential commodities either

complete prohibition or restrictions are imposed in the matter of carrying on

any trade or business, except in terms of a licence granted in that behalf by

the authorities specified in that behalf. The distinction between a trade or

business being carried out legally or illegally having regard to the

restrictions imposed by a statute would have, therefore, to be judged by the

fact as to whether such business is being carried out in compliance of the

provisions of the statute(s) operating in the field or not. In other words, so

long it is not made impermissible to carry on such business by reason of a

statute, no crime can be said to have been committed in relation thereto. The

doctrine of res extra commercium, thus, would not be attracted, whence a

person carries on business under a licence granted in terms of the provisions

of the regulatory statutes.

No case and in particular the decisions relied upon by the learned

counsel appearing on behalf of the State of Punjab and that of Kerala had

evolved a principle that despite paying a large amount of licence fees and

despite fulfillment of terms and conditions of licence and other statutory

provisions, the trade or business carried out by the licensee shall be at an

eternal peril, which may at any point of time be determinated or a new tax

imposed or they be proceeded against at the whims or caprice of the

executive wing of the State. In our constitutional scheme such a situation is

unthinkable. The country is governed by rule of law and despite existence

of a valid legislation operating in the field, executive whims or caprice

cannot be permitted to have any role to play. Validity of a tax imposed by

the State Legislature, thus, must be determined on the constitutional anvil of

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the legislative competence and not on any other basis. The decisions of this

Court which had no occasion to consider these aspects of the matter can be

of no assistance and would not constitute binding precedents. [See

Bhavnagar University vs. Palitana Sugar Mill (P) Ltd. and Others -

(2003) 2 SCC 111]

The right of the State to carry on trade or business under Article 298

of the Constitution would be subject to the same constitutional limitations in

the matter of carrying on trade or business in liquor as in other cases. The

distinction being only that the State has a monopoly to do so. Once the State

does not exercise the said right and considers it expedient to allow the

citizens to carry on the business or trade, it cannot be said that the licensees

do not derive any right whatsoever. Even when the State exercises such

right by creating a monopoly in itself, it would be subject to the same

constitutional limitations as envisaged, inter alia, under Articles 14 and 301

of the Constitution. Articles 14 and 301 of the Constitution protect from the

maladies of discrimination. Such discrimination may be in between persons

and persons, persons and State and State and State.

Can a State which exercises its right to create monopoly, prevent

another State to export or import its product? If in between two States such

discriminations are not possible, a discrimination inter se between licensees

of two States would also not be permissible. Such discrimination would also

not be permissible between a State and a person carrying on similar trade or

commerce in one State vis-`-vis a person or State carrying on business in

another State.

Once the regulations restricting the right to carry on business in

potable liquor is attributed to reasonable restrictions and public interest

clause, contained in clause (6) of Article 19 of the Constitution, the

fundamental right to carry on trade under Article 19 is conceded. Once such

a right is conceded, it cannot be said that although a person has a

Fundamental Right to carry on trade or business for the purpose of Article

19(1)(g), subject to imposition of reasonable restrictions by a law made in

terms of clause (6) of Article 19, he does not have such a right in terms of

Article 301 of the Constitution or for that matter Article 14 thereof. Articles

303 and 304 of the Constitution also provide for imposition of restrictions

and thus even a freedom guaranteed to a person under Article 301 is not an

absolute one, but subject to the constitutional limitations provided therefor.

Article 301 confers freedom but not a licence. The protection from

discrimination as envisaged in Khoday Distilleries (supra) [para 60(g)]

would not only operate against the State which is the licensor but having

regard to the constitutional goals to be achieved by the commerce clause

contained in Article 301, must be extended to another State which seeks to

impose restrictions on import.

Let me raise a hypothetical question. If some States intend to exercise

their right/ privilege/ monopoly in the trade in potable liquor - can such

imposition of tax be still justified? Answer thereto must be rendered in the

negative. Now the question is with regard to the applicability of Article 301

of the Constitution in the matter of trade, commerce and intercourse in

potable liquor. The preamble to the Constitution speaks of unity and

integrity of India in terms whereof India is required to be treated country as

a whole. This theory of unity and integrity of India may have to be found

out while considering the economic integrity of the country vis-`-vis the

economic barriers which may be put by the States. For the purpose of

considering the question as regards the interpretation of Article 301, one has

to notice the sources thereof. It is now beyond any cavil of doubt that except

a part of Part XIII of the Constitution the major part of the concept thereof

was borrowed from Sections 92 and 99 of the Australian Constitution as also

Section 297 of the Government of India Act, 1935.

Clause 17 of the draft as introduced before the Drafting Committee by

Sir. B.N. Rau in October, 1947 is in the following terms:

"Subject to the provisions of any Federal Law,

trade, commerce and intercourse among the units

shall, if between the citizens of the Federation, be

free:

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Provided that nothing in this section shall prevent

any unit from imposing on goods imported from

other units any tax to which similar goods

manufactured or produced in that unit are subject,

so, however, as not to discriminate between goods

so imported and goods so manufactured or

produced:

Provided further that no preference shall be given

by any regulation of trade, commerce or revenue to

one unit over another:

Provided also that nothing in this section shall

preclude the Federal Parliament from imposing by

Act restrictions on the freedom of trade, commerce

and intercourse among the units in the interests of

public order, morality or health or in cases of

emergency."

The marginal note appended to Sir B.N. Rau's clause 17 to the effect

"Freedom of trade, commerce and intercourse among the units" is clearly

suggestive of the fact that Section 92 of the Australian Constitution provided

for a comparable provision vis-a-vis other Constitutions. It is also beneficial

to notice that Sections 92 and 99 of the Australian Constitution confer

different rights and the same are independent of each other. Trade,

commerce and intercourse as noticed hereinbefore are of wide amplitude.

The term "commerce" is wider than trade.

In United States Vs. Patterson [55 Fed.Rep. 605 at 639], it is held:

"The word "commerce" is undoubtedly, in its

usual sense, a larger word than "trade", in its usual

sense. Sometimes "commerce" is used to embrace

less than "trade", and sometimes "trade" is used to

embrace as much as "commerce".

An inhibition by Article 301 has been provided to the effect that the

Legislature shall not interfere in the commerce between the State and State

as also to the effect that the Legislature of a State shall not give any

preference to one State over the other. Article 301 of the Constitution in no

uncertain terms provides for a freedom in the matter of trade, commerce and

intercourse. Such trade, commerce and intercourse are inter-State as also

intra-State. By reason of Part XIII of the Constitution, the Constitution

makers sought to evolve a high policy. On a comparison made between

Section 297 of the Government of India Act, 1935 with Part XIII of the

Constitution, it will be found that the latter is wider than the former. The

said part of the Constitution is a self-contained part. Several improvements

made in Part XIII of the Constitution as compared to Section 297 are worth

taking note of. By reason of the said provisions, the entire country has been

considered to be one economic unit. It now embraces within its fold both

'commerce and trade' and not 'trade' alone. 'Commerce' was provided for

in Entry 27 of List II only under the 1935 Act. Part XIII, however, refers to

the relevant entries contained in all the Lists of Seventh Schedule to the

Constitution. The limitation of power as regards legislative

competence of the State and the Parliament having regard to clause 2 of

Article 303 and sub-clauses (a) and (b) of Clause (1) of Article 304 is clear

pointer of the new dimension given to Article 301 of the Constitution. Even

if a comparison is made between the terminologies used in Article 301 on

the one hand and Articles 19 and 298 on the other, it would be evident that

whereas in the former 'trade, commerce and intercourse' have been used but

in the latter only the words 'trade or business' have been used. Such trade,

commerce and intercourse is in relation to entire territory of India whether

inter-State or intra-State unlike Section 297 of the Government of India Act.

Article 301 makes a declaration that 'trade, commerce and intercourse

throughout the territory of India shall be free', which in turn must mean that

it shall be free from control of Executive and Legislature. I may, however,

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hasten to add that by reason thereof although a liberty has been granted but

such liberty cannot be equated with a licence inasmuch it would be subject

to restrictions. Articles 302 and 303 categorically state that there shall be no

discrimination between one State and the other but restrictions inhere in such

liberty as would appear from clause 2 of Article 303 of Constitution, if a

situation stipulated therein arises for consideration. In other words,

discrimination is at the heart of this Chapter. By reason of the said

provision, the State is prohibited from imposing a tax without making any

discrimination whatsoever so as to impede free flow of inter-State or intra-

State trade. The State, however, is entitled to impose reasonable restrictions

as also levy tax in public interest. But the same indisputably would be

subject to the conditions laid down in Articles 303 and 304 of the

Constitution.

The precise question which arises for consideration is as to whether a

trade in liquor would come within the purview of trade, commerce and

intercourse, within the meaning of Article 301 of the Constitution. In the

earlier part of this judgment I have considered the difference between a trade

to which a citizen has an absolute right and a trade where no such absolute

right exists being dangerous or obnoxious; but once such trade is permitted

in terms of a regulatory statute, the same cannot be said to be per se illegal.

Earlier I have considered the difference between a trade which is not

prohibited under any law and a trade carrying whereof although is of

dangerous or obnoxious subjects but is permitted in law and subject to the

regulatory statute. For the purpose of invoking Part XIII of the Constitution,

one may safely proceed on the assumption that a citizen of India may not

have a Fundamental Right in terms of Article 19(1)(g) of the Constitution to

carry on a trade or business but there could be little difficulty in upholding

the right to carry on such trade on the ground that the same has been

permitted by the State, although a citizen but for such permission would not

have a right to deal in the commodity in question. It may be noticed that

in Article 303 of the Constitution the terminology used is "relating to".

These words are of wide amplitude. These expressions relate to all entries

relating to trade or commerce and not one entry in one of the Lists. It, thus,

refers to all such entries which are referable to trade and commerce

occurring in any of the three lists.

Tobacco is one of the goods which would otherwise come within the

purview of the doctrine of "Res extra commercium", if the meaning thereof

as judicially defined is held to be good. Dealing in tobacco is regulated by

the Tobacco Act, a Parliamentary Act. It is universally acknowledged that

cigarettes cause cancer but having regard to the Tobacco Act and other

statutes it cannot be contended that the State can prohibit business in

cigarette without any legislation, i.e., only through executive instructions. In

terms of Article 303 of the Constitution, Tobacco Act which is made in

terms of Entry 52 of List I of the Seventh Schedule to the Constitution

would prohibit the States from making any discriminatory legislation. It is,

therefore, difficult to understand as to how a prohibition can be imposed in

respect of liquor in relation whereto also a legislative power has been

conferred upon the State specifically in terms of Entries 8 and 51 in List II of

the Seventh Schedule to the Constitution.

At this juncture, it is useful to refer to the decision of this Court in

Atiabari Tea Company Limited (supra) wherein this Court in no uncertain

terms laid emphasis upon the economic unity of the country. In that case

before the Constitution Bench an argument was advanced to the effect that

Article 301 is circumscribed by Article 303 but the same was not accepted.

Gajendragadkar, J. (as he then was) held at pages 843-844 as follows:

"In drafting the relevant Articles of Part XIII the

makers of the Constitution were fully conscious

that economic unity was absolutely essential for

the stability and progress of the federal policy

which had been adopted by the constitution for the

governance of the country. Political freedom

which had been won, and political unity which had

been accomplished by the Constitution, had to be

sustained and strengthened by the bond of

economic unity. It was realised that in course of

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time different political parties believing in

different economic theories or ideologies may

come in power in the several constituent units of

the Union, and that may conceivably give rise to

local and regional pulls and pressures in economic

matters. Local or regional fears or apprehensions

raised by local or regional problems may persuade

the State Legislatures to adopt remedial measures

intended solely for the protection of regional

interests without due regard to their effect on the

economy of the nation as a whole. The object of

Part XIII was to avoid such a possibility. Free

movement and exchange of goods throughout the

territory of India is essential for the economy of

the nation and for sustaining and improving living

standards of the country. The provision contained

in Art. 301 guaranteeing the freedom of trade,

commerce and intercourse is not a declaration of a

mere platitude, or the expression of a pious hope of

a declaratory character; it is not also a mere

statement of a directive principle of state policy; it

embodies and enshrines a principle of paramount

importance that the economic unity of the country

will provide the main sustaining force for the

stability and progress of the political and cultural

unity of the country."

In Automobile Transport (Rajasthan) Ltd. (supra), the validity of

the tax impugned therein was upheld only on the ground that it was

compensatory in nature. There had been a cleavage of opinion amongst the

Hon'ble Judges in the said matter; three Hon'ble Judges holding that such

impost was ultra vires and three Hon'ble Judges holding the same to be intra

vires. Subba Rao, J. upheld the constitutionality of the impost by agreeing

with other three Hon'ble Judges on the ground that the impost was

compensatory in nature. The Bench not only accepted the constitutional

principles laid down by this Court in Atiabari (supra) but made a clear

distinction between the regulatory measures which can be adopted by a State

and imposition of a tax. It, further, struck a note of caution that a

geographical barrier cannot be set up by a State for the purpose of earning

revenue or for the benefit of the people thereof. It was held that Article 301

covers a wide area.

Subba Rao, J. elaborated as to what is the nature of a compensatory

tax. The learned Judge, further, emphasized the concept of freedom in the

following terms at pages 564-565 of the Report:-

"(1) Article 301 declares a right of free movement

of trade without any obstructions by way of

barriers, inter-State, or intra-State or other

impediments operating as such barriers. (2) The

said freedom is not impeded, but, on the other

hand, promoted, by regulations creating conditions

for the free movement of trade, such as, police

regulations, provision for services, maintenance of

roads, provision for aerodromes, Wharfs etc., with

or without compensation. (3) Parliament may by

law impose restrictions on such freedom in the

public interest; and the said law can be made by

virtue of any entry with respect where of

Parliament has power to make a law. (4) The State

also, in exercise of its legislative power, may

impose similar restrictions, subject to the two

conditions laid down in Article 304(b) and subject

to the proviso mentioned therein. (5) Neither

Parliament nor the State Legislature can make a

law giving preference to one State over another or

making discrimination between one State and

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another, by virtue of any entry in the Lists,

infringing the said freedom. (6) This ban is lifted

in the case of Parliament for the purpose of dealing

with situations arising out of scarcity of goods in

any part of the territory of India and also in the

case of a State under Article 304(b), subject to the

conditions mentioned therein. And (7) The State

can impose a non-discriminatory tax on goods

imported from other States or the Union territory

to which similar goods manufactured or produced

in that State are subject.

'Commerce and intercourse' include trade in all its manifestations.

Obstructions or impediments to the free flow of trade would be violative of

the freedom declared by Article 301. Subba Rao, J., in the said case held at

page 548 as under:

"The next question is, where is it free ? The

second, expression "throughout the territory of

India" demarcates the extensive field of operation

of the said freedom. The said intercourse shall be

free throughout the territory of India. The use of

the words 'territory of India" instead of 'among the

several States" found in the American Constitution

or "among the States" found in the Australian

Constitution, removes all inter-State or intra-State

barriers and brings out the idea that for the purpose

of the freedom declared, the whole country is one

unit. Trade cannot be free through-out the territory

of India, if there are barriers in any part of India,

be it inter-State or intra-State. So long as there is

impediment to that freedom, its nature or extent is

irrelevant. The difference will be in degree and not

in quality. The freedom declared under Article 301

may be defined as a right to free movement of

persons or things, tangible or intangible,

commercial or non-commercial, unobstructed by

barriers inter-State or intra-State or any other

impediment operating as such barriers. To State it

differently all obstructions or impediments

whatever shape they may take, to the free flow or

movement of trade, or non-commercial

intercourse, offend Article 301 of the Constitution

except in so far as they are saved by the

succeeding provisions."

It is beyond any cavil of doubt that Part XIII of the Constitution

contains a principle of importance as regards economic sovereignty and

integrity of India by doing away the trade barriers as also an attempt by the

State to provide economic protection to the States. Once, it is held that the

limitation upon the legislative power stipulated in Article 303(1), 304(a)

would apply to trade in liquor, there cannot be any doubt in view of several

Constitution Bench decisions of this Court that Article 301 will also apply

thereto. [See Kalyani Stores (supra), H. Anraj (supra) and Bhailal Bhai

(supra)].

In A.B.Abdul Kadir & Ors. Vs. State of Kerala, AIR 1976 SC 182,

this Court, when the validity of a luxury tax (in the nature of excise duty) on

tobacco was challenged as violative of Article 304(b), proceeded on the

basis that the business was protected by Article 301 but rejected the plea, on

the merits, holding that the restrictions imposed were reasonable and in the

public interest.

In Anraj's case (supra) this Court considered Entry 34 of List II in

terms whereof the State Legislature has been conferred power to enact

Statutes on gambling. In M/s. Maruthi Agencies, Bangalore rep. by its

Proprietor Vs. The State of Tamil Nadu and others, 1997(1) MLJ 589, it

was held that in the event lotteries are organized by a State, sale of tickets

thereof cannot be prohibited in other States on the ground that it is gambling

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and prohibited by List II. If trade in liquor like gambling or betting were not

to be regulated by statutes it is difficult to comprehend as to why entries in

respect thereof have been made in the Seventh Schedule to the Constitution.

The American decisions relied upon before this Court may not be held

to have any application having regard to the fact that trade in liquor in the

United States of America was completely prohibited at one point of time but

the same was modified by reason of Constitution Twenty-first Amendment.

Let me now take the case of 21st Amendment in US Constitution. In the

Constitution of the United States, an express provision guaranteeing freedom

from inter-State trade and commerce does not exist. There only the

Congress is empowered to regulate commerce. In the States freedom on

trade and commerce clause only provides for a limitation upon the power of

the State Legislature but not Congress and the freedom is confined to the

inter-State aspect.

In Southern Pacific Co., Vs. State of Arizona (1945) 325 US 761, it

is stated:

"For a hundred years it has been accepted

constitutional doctrine that the commerce clause,

without the aid of congressional legislation, thus

affords some protection from state legislation

inimical to the national commerce, and that in such

cases, where Congress has not acted, this Court,

and not the State legislature, is under the

commerce clause the final arbiter of the competing

demands of state and national interests".

It is further stated:

"The Commerce Clause is a grant of authority to

Congress, and not a restriction on the authority of

that body."

In the United States, the inter-State restraint trade as such is prohibited

but a State is not denuded of its power imposing general taxes under its

taxing power. The state has also the power to regulate such aspects of

commerce which do not require a new form of national control. (See Bob-

Lo Excursion Company Vs. People of the State of Michigan.(1948) 333

US 28). Furthermore, in United States a complete prohibition was

imposed. The said prohibition was sought to be relaxed by 21st Amendment

which is in the following terms:

"Section 1. The eighteenth article of amendment to

the Constitution of the United States is hereby

repealed.

Section 2. The transportation or importation into

any State, Territory, or possession of the United

States for delivery or use therein of intoxicating

liquors, in violation of the laws thereof, is hereby

prohibited.

Section 3. This article shall be inoperative unless it

shall have been ratified as an amendment to the

Constitution by conventions in the several States,

as provided in the Constitution, within seven years

from the date of the submission hereof to the

States by the Congress."

In the United States of America, the State has the requisite power to

impose general taxes. Despite the same, an exemption granted in favour of

local manufacturers vis-`-vis the exporters was frowned upon by the

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American Courts.

In Bacchus Imports, Ltd. Vs. Herbert H. Dias (82 L.Ed. 2d 200),

the challenge was to the following effect:

"1a. Appellants challenge the constitutionality of

the Hawaii liquor tax, which is a 20% excise tax

imposed on sales of liquor at wholesale.

Specifically at issue are exemptions from the tax

for certain locally produced alcoholic beverages.

The Supreme Court of Hawaii upheld the tax

against challenges based upon the Equal Protection

Clause, the Import-Export Clause, and the

Commerce Clause. In re Bacchus Imports, Ltd.,

65 Haw 566, 656 P2d 724 (1982). We noted

probable jurisdiction, 462 US 1130, 77 L.Ed 2d

1365, 103 S Ct 3109 (1983), and now reverse."

White, J. speaking for the majority stated the law thus:

"3. A cardinal rule of Commerce Clause

jurisprudence is that "no State, consistent with the

Commerce Clause, may 'impose a tax which

discriminates against interstate commerce...by

providing a direct commercial advantage to local

business.'" Boston Stock Exchange v State Tax

Comm'n, 429 US 318, 329, 50 L Ed 2d 514, 97 S

Ct 599 (1977)(quoting Northwestern States

Portland Cement Co. v Minnesota, 358 US 450,

458, 3 L Ed 2d 421, 79 S ct 357, 67 ALR2d 1292

(1959)). Despite the fact that the tax exemption

here at issue seems clearly to discriminate on its

face against interstate commerce by bestowing a

commercial advantage on okolehao and pineapple

wine, the State argues - and the Hawaii Supreme

Court held - that there is no improper

discrimination."

The Court noticed:

"(4a, 5) Much of the State's argument centers

on its contention that okolehao and pineapple wine

do not compete with the other products sold by the

wholesalers. The State relies in part on statistics

showing that for the years in question sales of

okolehao and pineapple wine constituted well

under one percent of the total liquor sales in

Hawaii. It also relies on the statement by the

Hawaii Supreme Court that "we believe we can

safely assume these products pose no competitive

threat to other liquors produced elsewhere and

consumed in Hawaii," In re Bacchus Imports,

Ltd., 65 Haw, at 582, n 21, 656 P2d, at 735, n 21,

as well as the court's comment that it had "good

reason to believe neither okolehao nor pineapple

wine is produced elsewhere." Id., at 582, n 20,

656 P 2d, at 735, n 20. However, neither the small

volume of sales of exempted liquor nor the fact

that the exempted liquors do not constitute a

present "competitive threat" to other liquors is

dispositive of the question whether competition

exists between the locally produced beverages and

foreign beverages; instead, they go only to the

extent of such competition. It is well settled that

"we need not know how unequal the Tax is before

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concluding that it unconstitutionally

discriminates." Marryland v. Louisiana, 451 US

725, 760, 68 L Ed 2d 576, 101 S Ct 2114 (1981).

The State's position that there is no

competition is belied by its purported justification

of the exemption in the first place. The legislature

originally exempted the locally produced

beverages in order to foster the local industries by

encouraging increased consumption of their

product. Surely one way that the tax exemption

might produce that result is that drinkers of other

alcoholic beverages might give up or consume less

of their customary drinks in favor of the exempted

products because of the price differential that the

exemption will permit. Similarly, nondrinkers,

such as the maturing young, might be attracted by

the low prices of okolehao and pineapple wine.

On the stipulated facts in this case, we are

unwilling to conclude that no competition exists

between the exempted and the nonexempted

liquors."

As regards the State's right on economic protectionism it was said:

"A finding that state legislation constitutes

"economic protectionism" may be made on the

basis of either discriminatory purpose, see Hunt v

Washington Apple Advertising Comm'n, 432 US

333, 352-353, 53 L Ed 2d 383, 97 S Ct 2434

(1977), or discriminatory effect, see Philadelphia v

New Jersey, supra. See also Minnesota v Clover

Leaf Creamery Co., supra, at 471, n 15, 66 L Ed 2d

659, 101 S Ct 715. Examination of the State's

purpose in this case is sufficient to demonstrate the

State's lack of entitlement to a more flexible

approach permitting inquiry into the balance

between local benefits and the burden on interstate

commerce. See Pike v Bruce Church, Inc., 397 US

137, 142, 25 L Ed 2d 174, 90 S Ct 844 (1970).

The Hawaii Supreme Court described the

legislature's motivation in enacting the exemptions

as follows:

"The legislature's reason for exempting 'ti

root okolehao' from the 'alcohol tax' was to

'encourage and promote the establishment

of a new industry,' S.L.H. 1960, c 26; Sen

Stand Comm Rep No. 87, in 1960 Senate

Journal, at 224, and the exemption of 'fruit

wine manufactured in the State from

products grown in the State' was intended

'to help' in stimulating 'the local fruit wine

industry'. S.L.H. 1976, c 39; Sen Stand

Comm Rep No. 408-76, in 1976 Senate

Journal, at 1056." In re Bacchus Imports,

Ltd. supra at 573-574, 656 P2d, at 730.

Thus, we need not guess at the legislature's

motivation, for it is undisputed that the purpose of

the exemption was to aid Hawaiian industry.

Likewise, the effect of the exemption is clearly

discriminatory, in that it applies only to locally

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produced beverages, even though it does not apply

to all such products. Consequently, as long as

there is some competition between the locally

produced exempt products and non-exempt

products from outside the State, there is a

discriminatory effect."

The Learned Judge proceeded to observe:

"No one disputes that a State may enact laws

pursuant to its police powers that have the purpose

and effect of encouraging domestic industry.

However, the Commerce Clause stands as a

limitation on the means by which a State can

constitutionally seek to achieve that goal. One of

the fundamental purposes of the Clause "was to

insure ...against discriminating State legislation."

Welton v Missouri, 91 US 275, 280, 23 L Ed 347

(1876). In Welton, the Court struck down a

Missouri statute that "discriminated in favor of

goods, wares, and merchandise which are the

growth, product, or manufacture of the State, and

against those which are the growth, product or

manufacture of other states or countries..." Id., at

277, 23 L Ed 347. Similarly, in Walling v

Michigan, 116 US 446, 455, 29 L Ed 691, 6 S Ct

454 (1886), the Court struck down a law imposing

a tax on the sale of alcoholic beverages produced

outside the State, declaring:

"A discriminating tax imposed by a State

operating to the disadvantage of the products

of other States when introduced into the first

mentioned State, is, in effect, a regulation in

restraint of commerce among the States, and

as such is a usurpation of the power

conferred by the Constitution upon the

Congress of the United States."

See also I.M. Darnell & Son Co. v Memphis, 208

US 113, 52 L Ed 413, 28 S Ct 247 (1908)."

It was held:

"We also find unpersuasive the State's contention

that there was no discriminatory intent on the part

of the legislature because "the exemptions in

question were not enacted to discriminate against

foreign products, but rather, to promote a local

industry." Brief for Appellee Dias 40. If we were

to accept that justification, we would have little

occasion ever to find a statute unconstitutionally

discriminatory. Virtually every discriminatory

statute allocates benefits or burdens unequally;

each can be viewed as conferring a benefit on one

party and a detriment on the other, in either an

absolute or relative sense. The determination of

constitutionality does not depend upon whether

one focuses upon the benefited or the burdened

party. A discrimination claim, by its nature,

requires a comparison of the two classifications,

and it could always be said that there was no intent

to impose a burden on one party, but rather the

intent was to confer a benefit on the other.

Consequently, it is irrelevant to the Commerce

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Clause inquiry that the motivation of the

legislature was the desire to aid the makers of the

locally produced beverage rather than to harm out-

of-state producers."

The learned Judge explained the application of 21st Amendment by

posing the question:

"Whether the interests implicated by a state

regulation are so closely related to the powers

reserved by the Twenty-first Amendment that the

regulation may prevail, notwithstanding that its

requirements directly conflict with express federal

policies."

and answered the same :

"Approaching the case in this light, we are

convinced that Hawaii's discriminatory tax cannot

stand. Doubts about the scope of the

Amendment's authorization notwithstanding, one

thing is certain: The central purpose of the

provision was not to empower States to favor local

liquor industries by erecting barriers to

competition. It is also beyond doubt that the

Commerce Clause itself furthers strong federal

interests in preventing economic Balkanization.

South-Central Timber, Development, Inc. v

Wunnicke, 467 US 82, 81 L Ed 2d 71, 104 S Ct

2237 (1984); Hughes v Oklahoma, 441 US 322, 60

L Ed 2d 250, 99 S Ct 1727 (1979); Baldwin v

G.A.F. Seelig, Inc., 294 US 511, 79 L Ed 1032, 55

S Ct 497, 101 ALR 55 (1935). State laws that

constitute mere economic protectionism are

therefore not entitled to the same deference as laws

enacted to combat the perceived evils of an

unrestricted traffic in liquor. Here, the State does

not seek to justify its tax on the ground that it was

designed to promote temperance or to carry out

any other purpose of the Twenty-first Amendment,

but instead acknowledges that the purpose was "to

promote a local industry." Brief for Appellee Dias

40. Consequently, because the tax violates a

central tenet of the Commerce Clause but is not

supported by any clear concern of the Twenty-first

Amendment, we reject the State's belated claim

based on the Amendment."

The minority opinion, however, proceeded on the basis that by reason

of Twenty-first Amendment, the State has the power to create a monopoly.

Such constitutional permissibility is absent from our constitutional scheme.

It may be noticed that the same principles as in Atiabari (supra) or

Automobile (supra) have been applied by the Privy Council and the

Australian Courts while interpreting Section 92 of the Australian

Constitution to hold that even for any purpose for which the State has acted

the legislation would not be relevant criteria for declaring it ultra vires if it is

found that the same interferes with the right of trade. (See James Vs.

Commonwealth of Australia (1936) A.C.578, North Eastern Dairy Co.

Ltd. Vs. Dairy Industry Authority of New South Wales (1974-1975) 134

C.L.R. 559 at 581, The Commonwealth & Ors. Vs. Bank of New South

Wales & Ors. (1949) 79 C.L.R. 497).

Mason, J. in Pilkington Vs. Frank Hammond Pty. Ltd. (1974) 131

C.L.R. 124 interpreted Section 92 of the Australian Constitution in the

following terms:

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"The section does not in terms speak of the private

right of the individual to engage in trade,

commerce, and intercourse among the States; it

refers to trade, commerce and intercourse among

the States as an entire and total concept and

provides that it is to be 'absolutely free' in the

sense in which this expression has been discussed

in the decided cases. In saying so much the

section protects the right of the individual to

engage in inter-State trade, commerce and

intercourse but it needs to be recognized that this

protection is incidental to, and in a sense

consequential upon, the protection which is given

to the entire concept of inter-State trade, commerce

and intercourse, including the various acts and

transactions by which it is constituted."

Reference in this connection may also be made to North Eastern

Dairy Co. Ltd. Vs. Dairy Industry Authority of New South Wales (1974-

1975) 134 C.L.R. 559, at 615).

In India, the constitutional guarantee under Article 301 of the

Constitution is more extensive than either in United States or Australia. The

decisions of United States Supreme Court and Australian Supreme Court as

also the Privy Council, as referred to hereinbefore, clearly demonstrate that

in these countries, although States have more constitutional freedom but

despite the same Commerce Clause received ample protection at the hands

of the Judiciary.

Subba Rao, J. in Automobile case (supra) observed:

"The freedom declared under Article 301 may be

defined as a right to free movement of persons or

things, tangible or intangible, commercial or non-

commercial, unobstructed by barriers, inter-State

or intra-State or any other impediment operating as

such barriers. To state it differently, all

obstructions or impediments, whatever shape they

may take, to the free flow or movement of trade, or

non-commercial intercourse, offend Article 301 of

the Constitution except in so far as they are saved

by the succeeding provisions."

The public character theory although is an important, but has a

limitation on the individual right which is guaranteed; having regard to the

fact that legislative restriction ultimately permits the individual State to go

ahead, only subject to the reasonable restriction. The rule against enacting

protectionist measures has also been noticed by the High Court of Australia

in Cole Vs. Whitfield & Anr. (1987-1988) 165 CLR 360, settling a long

debate.

In Shree Mahavir Oil Mills and Another Vs. State of J&K and

Others (1996) 11 SCC 39 at pages 53-54, this Court while rejecting an

argument of justification of exemption from sales tax of small scale

industrial units within the State of J&K on the ground that the commodity

produced within the State and that produced in other States and sold in J&K,

constitute different classes, has held as under:-

"The States are certainly free to exercise the power

to levy taxes on goods imported from other

States/Union Territories but this freedom, or

power, shall not be so exercised as to bring about a

discrimination between the imported goods and the

similar goods manufactured or produced in that

State. The clause deals only with discrimination by

means of taxation; it prohibits it. The prohibition

cannot be extended beyond the power of taxation.

It means in the immediate context that States are

free to encourage and promote the establishment

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and growth of industries within their States by all

such means as they think proper but they cannot, in

that process, subject the goods imported from other

States to a discriminatory rate of taxation, i.e., a

higher rate of sales tax vis-a-vis similar goods

manufactured/produced within that State and sold

within that State. Prohibition is against

discriminatory taxation by the States. It matters not

how this discrimination is brought about.............

We find it difficult to appreciate how can the

concept of classification be read into clause (a) of

Article 304 to undo the precise object and purpose

underlying the clause. Shri Verma repeatedly

stressed that the object underlying the impugned

measure is a laudable one and that it seeks to serve

and promote the interest of the State of Jammu and

Kashmir which is economically and industrially an

undeveloped State, besides being a disturbed State.

We may agree on this score but then the measures

necessary in that behalf have to be taken by the

appropriate authority and in the appropriate

manner. Part XIII of the Constitution itself

contains adequate provisions to remedy such a

situation and there is no reason why the necessary

measures cannot be taken to protect the edible oil

industry in the State in accordance with the

provisions of the said Part."

It is thus evident that any manner of extension of protection to trade or

business within the frontiers of State, at the cost of free inter-State trade or

commerce will not stand the test of Article 301. The scheme of

compensatory taxes, operate in an entirely different sphere. They cannot be

confused with measures which are both in form and substance protectionist

impositions.

In Brown Vs. Maryland (1827) 12 Wheat 419, the US Supreme

Court in the context of the competence of the States to enact and impose a

duty on imports or exports has held that the power to regulate inter state

commerce in non-discriminatory fashion and "to break down or to eliminate

barriers to trade amongst the States" is an essential federal power. It has,

therefore, been said that in the absence of such a power "local interest

exerting powerful influences in State Legislatures would, in the long run,

prefer home industries over those that are out of state, establish tariff

barriers, or employ other means tending to Balkanize the nation into hostile

trade areas." [See also William O. Doughlas J: From Marshall to Mukherjea:

Tagore Law Lectures 1956 P. 169].

In James Vs. Commonwealth of Australia 1936 AC 578, referring

to McArthur's case 28 CLR 530 it was held:

"It is now convenient to examine the actual

language of the Constitution so far as relevant, in

order to ascertain its true construction. The first

question is what is meant by "absolutely free" in s.

92. It may be that the word "absolutely" adds

nothing. The trade is either free or it is not free.

"Absolutely" may perhaps be regarded as merely

inserted to add emphasis. The expression

"absolutely free" is generally described as popular

or rhetorical. On the other hand, 'absolutely' may

have been added with the object of excluding the

risk of partial or veiled infringements. In any case,

the use of the language involves the fallacy that a

word completely general and undefined is most

effective. A good draftsman would realize that the

mere generality of the word must compel

limitation in its interpretation. "Free" in itself is

vague and indeterminate. It must take its colour

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from the context. Compare, for instance, its use in

free speech, free love, free dinner and free trade.

Free speech does not mean free speech; it means

speech hedged in by all the laws against

defamation, blasphemy, sedition and so forth; it

means freedom governed by law, as was pointed

out in McArthur's case. Free love, on the contrary,

means licence or libertinage, though, even so, there

are limitations based on public decency and so

forth. Free dinner generally means free of

expense, and sometimes a meal open to any one

who comes, subject, however, to his condition or

behaviour not being objectionable. Free trade

means, in ordinary parlance, freedom from tariffs.

"Free" in s. 92 cannot be limited to freedom in the

last mentioned sense. There may at first sight

appear to be some plausibility in that idea, because

of the starting-point in time specified in the

section, because of the sections which surround s.

92, and because the proviso to s. 92 relates to

customs duties. But it is clear that much more is

included in the term; customs duties and other like

matters constitute a merely pecuniary burden; there

may be different and perhaps more drastic ways of

interfering with freedom, as by restriction or

partial or complete prohibition of passing into or

out of the State.

Nor does "free" necessarily connote absence of

discrimination between inter-State and intra-State

trade. No doubt conditions restrictive of freedom

of trade among the States will frequently involve a

discrimination; but that is not essential or decisive.

An Act may contravene s.92 though it operates in

restriction both of intra-State and of inter-State

trade."

However, in India Part XIII of the Constitution relates both to inter-

State trade and commerce as also intra-State trade.

In Fox Vs. Robbins [8 CLR 115], It was held:

"Sec. 92 of the Constitution does not reframe State

Acts by making new affirmative legislation not

contemplated by the State Parliament. It prevents

adverse discrimination from being lawful; so far as

the Act can be effectively worked in conformity

with the constitutional requirement it still stands;

so far as it cannot it simply ceases to operate."

Once it is held that the principle of res-extra commercium is not

applicable, the decisions in Kalyani Stores (supra), H. Anraj (supra) and

Bhailal Bhai (supra) having been rendered by a Constitution Bench would

constitute binding precedents. Once it is held that the Legislature has no

power to levy any excise duty on imported liquor in excess of the

countervailing duty within the State, having regard to the constitutional

limitation imposed in terms of Entry 51, List II of Seventh Schedule to the

Constitution, such discriminatory levy must be held to be violative of Article

303(1) and 304(a) of the Constitution. As import fee is an impost, thus, levy

thereof in addition to countervailing duty would clearly attract the wrath of

Article 304(a) of the Constitution. It has not been and could not have been

contended that the tax is compensatory in nature as was the case in

Automobile (supra). I am, therefore, of the opinion that the impugned

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impost cannot be upheld.

Before parting, however, I may notice the submission made by Mr.

Iyer on behalf of the State of Kerala that the licensees, having obtained a

privilege and enjoyed the benefit out of it, cannot, turn round subsequently

and repudiate the obligations subject to which they obtained the privilege.

The submission of Mr. Iyer is wholly mis-conceived for more than one

reason. The manufacturers of liquor outside the State of Kerala did not

obtain any privilege from the State. The decisions relied upon by the

learned counsel, namely, Har Shankar (supra), Jage Ram (supra), Lal

Chand (supra), M/s. Dial Chand Gian Chand and Company (supra), thus,

cannot be said to have any application in the instant case. The decisions in

these cases were rendered in the fact situation obtaining therein. The

licensees therein questioned the power of the State to hold auction by the

State and/or they refused to comply with the terms and conditions of licence.

In fact in Harshankar (supra) the Court on the factual matrix obtaining

therein clearly came to the conclusion that the writ petition was not

maintainable as thereby the licensees sought avoidance from compliance of

contractual terms and licensing conditions and, thus, they were not entitled

to any relief. The writ petitioners before the High Court had not questioned

any of the terms and conditions of the licence. In Kerala case they are not

even licensees at all. They are manufacturers of potable liquor, licences

wherefor had been granted by other States. The State of Kerala has not

parted any privilege in their favour. Even otherwise when the legislative

competence of a State is in question, the same goes to the root of the

jurisdiction. Once it is found that the State Legislature has exceeded its

jurisdiction in imposing the impugned levy, the same being a fraud on the

Constitution cannot be sustained on the procedural doctrine of estoppel or

waiver.

For the reasons aforementioned, Civil Appeal No. 3017 of 1997 is

dismissed and impugned judgment rendered by the Punjab and Haryana

High Court quashing the Notification impugned before it is upheld. On

23.7.1998 when prayer for grant of interim relief was being considered, a

prayer was made by Shri Harish N. Salve, learned Senior Counsel, appearing

on behalf of the State of Punjab, to the effect that operation of impugned

judgment rendered by the High Court may be stayed as the State was ready

to undertake before this Court to refund the amount that would be realized

by way of import duty together with interest thereon @ 15% per annum to

the respondents in the event of dismissal of State's appeal by this Court and

the said prayer having been acceded to, this Court stayed the operation of the

judgment rendered by the High Court upon the aforesaid undertaking. In

view of this, the State of Punjab is hereby directed to refund the amount that

has been realized by it by way of import duty to the respondents together

with interest thereon @ 15% per annum from the date of its realization till

payment, which must be made within a period of three months.

Civil Appeal Nos. 2696-2697 are allowed and the Notification

impugned before the Kerala High Court is quashed.

There shall be no order as to costs.