ORDER
M. Rama Jois, J.
1. In these writ petitions presented by the petitioners who are excise contractors and who are successful bidders in the excise auction and have purchased the right to vend arrack, from the Government, the question of law which arises for consideration is:
Whether arrack is not a product of manufacture And if not,' whether it is competent for the state legislature to make a law providing for levy of excise duty on arrack?
2. The facts of the case, and the relevant provisions of the Act and the Rules framed thereunder are as follow: Section 2(19) of the Karnataka Excise Act ('the Act' for short) defines the word 'manufacture'. It reads:
2(19) 'Manufacture' includes every process whether natural or artificial by which any fermented, spirituous or intoxicating liquor or intoxicating drug is produced or prepared and also re-distillation and every process for the rectification of liquor.
Section 22 of the Act empowers the State Government to levy excise duty on excisable articles. It reads:
22. Excise duty or countervailing duty on excisable Articles.-- (1) An excise duty at such rate or rates as the State Government may prescribe, shall be levied on any excisable article manufactured or produced in the State under any licence or permit granted under this Act.
(2) A countervailing duty at such rate or rates as the State Government may prescribe shall be levied on any excisable article manufactured or produced in India outside the State and imported into the State under a licence or permit granted under this Act.
(3) The rates prescribed under Sub-section (1) and (2) may be different for different kinds of excisable articles and may also be different when levied in the different ways specified in Section 23.
In exercise of the powers under Section 22 read with Section 71 of the Act, the Government has framed the Karnataka Excise (Excise Duties) Rules, 1968. Rule 1A, which is relevant for the purpose of this case, reads:
1A. Definition.--In these rules unless the context otherwise requires, 'London Proof Spirit' means a compound of ethyl alcohol and distilled water which at the temperature of 51 degrees Fahrenheit weigh exactly 12/13th parts of an equal measure of distilled water at the same temperature.
Rule 2 which provides the manner of levying excise duty reads:
Manner of Levying Excise duties.--...(An excise duty or litre fee or both) shall be levied on the excisable articles specified in column 2 of the Schedules A and B hereto annexed at the rate specified in the corresponding entries in Column 3 thereof when such excisable articles are....
(a) *****
(b) issued from any distillery, warehouse or other place of storage established or licensed in the State under any of the provisions of the KarnatakaExcise Act, 1965.
The rates of excise duty as prescribed in the Rules as amended by the amendment rules dated 9-8-1985 are as below:
RATES OF EXCISE DUTY
__________________________________________________________________________________________
SI. Name of the Rate of
No. article duty.
__________________________________________________________________________________________
(1) (2) (3)
__________________________________________________________________________________________
1. Molasses Arrack of the strength of 35 under Rs. 6.00 per bulk litre.
proof
2. Brandy, whisky, gin, milk punch and such other
liquors not including wine, toddy, fenny,
specified in serial number 3, 4 and 5 manufactured
at several distilleries of Karnataka State or
manufactured in other places in India and imported
to Karnataka State:---
(a) of the strength of London proof Rs. 34.67 per proof litre.
(b) of the strength of 20* under proof Rs. 27.75 per bulk litre.
(c) of the strength of 25 under proof Rs. 26.00 per bulk litre.
(d) of the strength of 50 under proof Rs. 17.35 per bulk litre.
3. Wine of the strength:
(a) 65 under proof or less Rs. 0.75 per bulk litre.
(b) more than 65 under proof Rs. 1.35 per bulk litre.
4. Bottled toddy Rs. 0.40 per proof litre.
5. Fenny of the strength of 35 under proof Rs. 8.65 per bulk litre.
6. Rectified spirit and alcohol of the strength of
London proof Rs. 9.75 per proof litre.
7. Beer Rs. 1.55;per bulk litre.
Since the commencement of these Rules, persons who have purchased the right to vend arrack were required to pay excise duty at the rate prescribed at column No. 3 of the schedule extracted above. Questioning the legality of the rules as also the competence of the legislature under entry 51 of List II of the VII Schedule to the Constitution, the petitioners have presented these petitions.
3. The plea of the petitioners in the writ petitions is as under: Rectified spirit was not an alcoholic liquor meant for human consumption. Therefore, under entry 51 it was not competent for the legislature to levy excise duty on the manufacture of rectified spirit. This point is covered by a Division Bench judgment of this Court in the case of State of Karnataka v. Abdul Salam W.A. No. 1097/1980, dated 30-6-1982. When the State Government was prevented from levying excise duty on rectified spirit, Schedule-A to the Rules were amended on 24-6-1983, whereby rectified spirit and alcohol of the strength of London proof were made liable for excise duty at the rate prescribed in the Schedule. While the rectified spirit is not meant for human consumption, the rectified spirit of London proof is fit for human consumption. The strength of the rectified spirit of London proof is 60 to 65 under proof and if it is reduced below 25 under proof, it becomes potable liquor. If specially treated water is added to it and it is allowed to mature for 15 days, it becomes arrack. The prescribed condition is that the arrack must be 35 under proof or below it. Arrack is nothing but London proof rectified spirit with the addition of specially treated water and allowed to mature for 15 days. Therefore, it cannot be said that arrack is manufactured. As the arrack is not a product of manufacture, there was no competence for the State Legislature to levy excise duty. If the definition of the word 'manufacture' given in Section 2(19) were to be understood as wide enough to include the preparation of arrack from rectified spirit of London proof, then the definition itself is beyond the competence of the legislature for under entry 51 of the State List, it is competent for the legislature to levy excise duty on manufacture of liquor for human consumption, and, therefore, the Legislature cannot widen the definition in order to cover an item which is not a product of manufacture. In support of the contention that the arrack was not a product of manufacture, the learned Counsel for the petitioners relied on the following decisions:
(i) Commissioner of Sales Tax, U.P. v. Dr. Sukh Deo : [1969]1SCR710 , in which the Supreme Court held that the process of mixing of dispensary medicines and pharmaceutical preparations by a doctor would not amount to manufacture of a medicine;
(ii) Commissioner of Sales Tax, U.P. v. Harbilas Rai and Sons (1968) 21 STC 17, in which the Supreme Court held that cleaning and arranging of pig bristles purchased for sale in foreign countries according to their sizes and colours and tying them in bundles, did not amount to manufacture;
(iii) Chowgule & Co. Pvt. Ltd. v. Union of India [1981] 47 STC 124, in which the Supreme Court held that washing, screening, dressing and blending of the ore from different stock piles with a view to produce ore of the specifications of the purchaser in foreign market did not amount to manufacture of any new item;
(iv) The Deputy Commissioner, Sales Tax v. Pio Food Packers : 1980(6)ELT343(SC) , in which the Supreme Court held that the process by which pineapple fruits were made into slices and packing them in sealed tins for purposes of sale did not amount to manufacture of a new commercial commodity;
(v) State of Maharashtra v. The Central Provinces Manganese Ore Company Ltd. : [1977]1SCR1002 in which the view taken was similar to the one in Chowgule's case [1981] 47 STC 124;
(vi) P.C. Cheriyan v. Barfi Devi : 1979(4)ELT593(SC) in which the Supreme Court held that retreading of old tyres did not result in manufacture of any new article;
(vii) Sterling Foods v. State of Karnataka : 1986(26)ELT3(SC) in which the Supreme Court held that cutting heads and tails, peeling, deveining and cleaning shrimps, prawns and lobsters and freezing them before export, did not result in manufacture of new goods;
(viii) Sri Lakshmi Coconut Industries v. State of Karnataka [1980] 46 STC 404 in which a Division Bench of this Court held that the preparation of desiccated coconut from the coconut did not result in manufacture of commercially a new item of goods;
(ix) Pachiappa Chettiar and Brothers v. State of Madras [1962] 13 STC 202 in which the Madras High Court held that treating of tobacco with palm jaggery water and drying it in shades and cutting into required sizes and packing in bundles for sale did not amount to manufacture of a new item of goods; and
eligible Rocks Builders and Suppliers v. State of Karnataka [1982] 49 STC 110 in which this Court held that breaking of boulders and converting them into jelly did not amount to manufacture of a new article.
4. Sri M.R. Achar, learned Government Advocate, who was directed to take notice and make submissions, however, maintained that London proof spirit and arrack are at commercial and common parlance, entirely two different articles and the latter is manufactured out of the former and therefore it was competent for the State to levy excise duty on arrack. In support of his submission that arrack is a product of 'manufacture' he relied on the judgment of the Supreme Court in the case of State of Mysore v. Raghurama Setty : [1981]3SCR280 in which the Supreme Court, reversing a Division Bench judgment of this Court, held that hulling of paddy and converting it into rice amounted to manufacture of rice, for, in ordinary parlance paddy and rice are two different articles, reiterating the earlier decision of the Supreme Court in the case of Ganesh Trading Co. v. State of Haryana : AIR1974SC1362 . He also relied on an earlier judgment of the Supreme Court in the case of Anwarkhan Mahboob Co. v. State of Bombay : [1961]1SCR709 , in which the Supreme Court held that the process of removing stem and dust from raw tobacco with the purpose of selling it to beedi manufacturers, which was called as 'beedi patti' in common parlance, was itself regarded as a product of manufacture, as raw tobacco and beedi patti were commercially two different articles.
5 A careful consideration of the ratio of the decisions on which the learned Counsel relied, would show that as far as the criteria applied to find out as to whether in a given case the item concerned was as a result of the process of manufacture is concerned, the same criteria has been applied in all those cases. This aspect is brought forth in Pio Food Packers' case : 1980(6)ELT343(SC) in which the Supreme Court stated thus:
6. A large number of cases has been placed before us by the parties, and in each of them the same principle has been applied: Does the processing of the original commodity bring into existence a commercially different and distinct article?
(Underlining by me)
Therefore, the crucial question for consideration is, whether the arrack is not a commercially different article from the article from which it is produced If it cannot be said that arrack is a different commercial commodity, the contention urged for the petitioners would be unexceptionable. If on the other hand, the arrack is commercially a different article from which it is produced, then there is no alternative than to hold that there is a process of manufacture and therefore it is competent for the State to levy excise duty by virtue of entry 51 of List II.
6. Now, as can be seen from the Schedule, extracted earlier, the molasses arrack of the strength of 35 under proof and the rectified spirit and alcohol of the strength of London proof are two separate items in respect of which excise duty is levied under the Rules. In fact, the petitioners have indicated the process by which arrack comes into existence in paragraphs 9 and 10 of the petitions. They read:
9. According to the Karnataka Excise Department the rectified spirit of London proof is concentrated form of arrack. The strength of rectified spirit London proof is 60 degree to 67 degree U.P. If it is reduced below 25 degree U.P. it becomes potable liquor. If water is added to rectified spirit, it becomes arrack. It becomes other kinds of liquors according to essence added to it.
10. The Government has directed certain parties to establish warehouses (Arrack Reduction Centres) and feeding centres (District Arrack Centres) at places mentioned by the Government, The Government will purchase London proof rectified spirit and supply the same to the parties who have to reduce the strength of the rectified spirit so supplied with specially treated water and they have to mature the arrack for at least 15 days and must deliver the arrack to the places mentioned by the Government. The parties must see that arrack must (sic) of 35 degree U.P. The Government has entered into agreements with various parties in this behalf and the blending must be done in accordance with the instructions and directions issued by the Excise Commissioner or any other officer in this behalf.' Thus it may be seen that there is no dispute that as far as rectified spirit is concerned, it is not fit for human consumption. It is only when rectified spirit is converted into alcohol of the strength of London proof, and further diluted, it becomes fit for human consumption. Further, it is only when alcohol of the strength of London proof is mixed with the required quantity of specially treated water and is allowed to mature for 15 days, it becomes arrack of the strength of 30 under proof. Under commercial and common parlance alcohol of the strength of London proof and arrack are two distinct and separate articles. Just because the latter is produced from the former, is no ground to hold that arrack is commercially not a different article. Just as rice is at common parlance regarded as different from paddy, as held in Raghuram Setty's case : [1981]3SCR280 , and beedi pattis produced from raw tobacco, only by the process of removing stem and dust, which is used in the manufacture of beedis is itself held to be product of manufacture in the case of Anwarkhan Mahboob Company : [1961]1SCR709 , it should be held that arrack is entirely a different article, at common parlance, from rectified spirit and alcohol of the strength of London proof. Just as beedi is used for smoking by large Section of the people, arrack is an intoxicating liquor which is consumed by a sizable Section of the society. The quantity of arrack sold and consumed is huge. Thus arrack is a distinct and separate commodity from rectified spirit and alcohol of the strength of London proof. One is not the same as the other. In fact, everyone of the seven items referred to in Schedule A to the Rules are commercially different articles, though all of them are produced from alcohol. That being the position, it follows that it is competent for the State Legislature to levy excise duty on arrack as it is a product of manufacture.
7. For the aforesaid reasons, I answer the question set out first as follows:
That the arrack is a product of manufacture and as the arrack is analcoholic liquor meant for human consumption, it is competent for the state legislature to make a law providing for levy of excise duty on arrack under entry 51 of List II of the VII Schedule to the Constitution of India.
8. As far as the stage at which the excise duty could be collected is concerned, the matter is covered by the decision of the Supreme Court in the caseof McDowell v. Commercial Tax Officer : [1977]1SCR914 . In view of the ratioof the said decision, the levy and collection of excise duty at the purchase pointis also valid.
9. In the result, I make the following order:
(i) The writ petitions are dismissed,
(ii) No Costs.
Sri M.R. Achar, learned Government Advocate, is permitted to file his memo of appearance.