Apex Court confirms demand of excise duty raised over McDowell for liquor lost in fire; says such demand is backed by U.P Bottling of Foreign Liquor Rules, 1969 and U.P Excise Manual

Read Judgment: State of UP through Secretary (excise) & Others vs. M/s Mcdowell & Company Limited

Pankaj Bajpai

New Delhi, January 7, 2022: The Supreme Court has  held that the taxable event was production or manufacture of this liquor, for it being a duty upon the goods and not upon sale or proceeds of sale of the goods, and therefore, the levy of excise duty on liquor lying stored in the bonded warehouse is not hit by Article 265 of the Constitution of India. 

At the same time, receiving of insurance claim over the value of goods by the distillery related back to the date of fire and the distillery became liable to pay excise duty at the rate which was in force on the date of fire, which would be deemed to be the date of “issue” from the warehouse, added the Court.

A Larger Bench of Justice A.M Khanwilkar, Justice Dinesh Maheshwari and Justice Krishna Murari observed that the liquor that was lying stored in the bonded warehouse had already become subject to the excise duty, with postponement of actual charging of the duty as per the rate applicable on the date and time of issue for sale from the warehouse.

No provision is made in the Uttar Pradesh Excise Manual for any wastage allowance in relation to the bottled sprit, but, in terms of Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969, an allowance up to 1% on the total quantity of spirit stored during a month may be allowed for actual loss in bottling and storage, added the Bench. 

Going by the background of the case, in a fire incident that took place in a godown of the distillery of Mcdowell & Company Limited (Respondent), as many as 35,642 cases of Indian Made Foreign Liquor (IMFL) of different brands got destroyed in this fire. After receiving the initial reports that the fire possibly took place due to short circuit of electricity, the department proposed to recover the amount of excise duty lost, due to such destruction of liquor, from the respondent company. The respondent however maintained that there was no negligence on its part and, therefore, no case for recovery of the alleged loss of excise duty was made out under Rule 7(11) of the Uttar Pradesh Bottling of Foreign Liquor Rules, 1969 and Rule 709 of the Uttar Pradesh Excise Manual (Excise Manual).

However, the Excise Commissioner rejected the submissions of the respondent and raised a demand to the tune of Rs. 6,39,32,449.44 towards loss of excise revenue on account of destruction of liquor. Accordingly, the District Magistrate, Shahjahanpur asked the respondent to deposit the amount within one week. Assailing the demand and recovery steps, the respondent-company approached the High Court, which passed an interim order staying the recovery proceedings, subject to the respondent company depositing an amount of Rs. 3 crores. Accordingly, the respondent company deposited the said amount of Rs. 3 crores with the District Magistrate, Shahjahanpur. 

Hence, the High Court ruled that Rule 7(11)(a) of the Rules of 1969 was not applicable in the matter because there was no wastage in handling operations of bottling and storage of IMFL; that Rule 709 of the Excise Manual was attracted for which negligence was required to be shown; that the order passed by the Excise Commissioner was based on conjectures and without any cogent evidence about negligence on the part of Respondent, which ‘incident was nothing but an act of God. 

Thereafter, for the department having failed to refund the amount deposited pursuant to the interim order, the respondent company moved an application before the High Court whereupon, the High Court directed the Excise Commissioner to take a decision on the application for refund within four weeks.  Hence, present appeal. 

After considering the submissions, the Apex Court noted that IMFL destroyed in fire in this case undoubtedly answered to the description of “spirit”, “liquor” and “excisable article” within the meaning of Clauses (8), (11) and (22-a) of Section 3 of the U.P Excise Act, 1910, for being an intoxicating liquor containing alcohol obtained by distillation; and the same was manufactured under a licence granted in terms of Section 17 in the distillery of the respondent and was kept in the warehouse established in terms of Section 18 of the Act of 1910. 

Thus, this liquor (IMFL) could not have been removed from the place of storage unless excise duty payable thereupon had been paid or a bond was executed for the payment thereof, added the Court. 

Moreover, the Top Court highlighted that the Government was not to be liable for any loss in the quantity of this stored liquor for whatever reason; and on the other hand, the distillery, i.e., the respondent was to be responsible for the safe custody thereof and also liable to make good any loss of revenue including owing to any loss during storage beyond permissible one per cent of the total quantity.

Considering that mandate, the respondent was solely liable for payment of excise duty on wastage of stored total quantity with allowance only up-to one per cent, as specified, added the Court.  

Speaking for the Bench, Justice Maheshwari observed that since any loss or wastage of the bottled spirit would be directly a loss of excise duty it had already become exigible to, the distillery remains responsible for safe custody of the stock of spirit and remains liable to make good any loss of revenue caused to the Government by their negligence.

The Larger Bench went on to observe that the goods in question, being highly inflammable, required extra and excessive care for their safe custody; and any laxity or slackness in that regard was impermissible. 

Thus, when the respondent had not been able to protect the goods in question from fire within the warehouse and when all other factors, are taken into account, the negligence as contemplated in Rule 709 of the Excise Manual is directly attributable to the respondent company, added the Bench.

Hence, the Apex Court concluded that the demand raised by the appellants against the respondent company, of excise duty on the liquor lost in fire, is authorized by law and has rightly been raised as per the applicable provisions of the Act of 1910, the Excise Manual and the Rules of 1969.