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Excise duty =(i) At what stage does the beer manufactured is exigible to duty? (ii) Whether the procedure adopted by the appellants for ascertaining excess manufacturing wastage (excess deficiency) is proper? =The appeals by the state relate to imposition of duty and additional duty on excess wastage in the brewery. The appeals by the Breweries relate to imposition of duty and additional duty on excess bottling wastage. -The process of bottling begins with the transfer of bulk beer from the brewery for bottling. Sub-section (2) of section 28A refers to an allowance to an extent of 10% not only in regard to losses within the brewery but also to cover losses in bottling and storage. As noticed above, Rule 53 of the Brewery Rules and Rule 7(11) of the Bottling Rules when read conjointly show that the said rules are supplementary to each other and together implement section 28A of the Act. At all events, the validity of neither Rule 53 of Brewery Rules nor Rule 7(11) of Bottling Rules is under challenge. Be that as it may.

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 Reportable 

 IN THE SUPREME COURT OF INDIA

 CIVIL APPELLATE JURISDICTION

 CIVIL APPEAL NOs. 4708-4709 OF 2002

State of U.P. & Ors. ... Appellants

Vs.

M/s Mohan Meakin Breweries Ltd. & Anr. ... Respondents

With

Civil Appeal No.4710 of 2002

Civil Appeal No.4711 of 2002

Civil Appeal No.4712 of 2002

Civil Appeal No.4713 of 2002

 J U D G M E N T

R. V. Raveendran J.

 Civil Appeal Nos.4708-4709 of 2002 are filed by the State of Uttar 

Pradesh aggrieved by the common order dated 15.3.2002 of the Allahabad 

High Court allowing CMWP No.3968 of 1978 and CMWP No.4043 of 1978 

filed by two Breweries. Civil Appeal Nos.4710, 4711, 4712 and 4713 of 

2002 are filed by the Breweries aggrieved by the said common order dated 

15.3.2002, dismissing their writ petitions - CMWP Nos.1375 of 1978, 3690 

 2

of 1979, 4136/1978 and 4157/1978. The appeals by the state relate to 

imposition of duty and additional duty on excess wastage in the brewery. 

The appeals by the Breweries relate to imposition of duty and additional 

duty on excess bottling wastage. 

Civil Appeal No.4708 of 2002

2. The first respondent (for short the `Brewery') held a Brewery Licence 

issued under section 18(c) of the Uttar Pradesh Excise Act, 1910 (`Act' for 

short) in Form-B1 and a Bottling Licence for bottling liquor for sale issued 

under section 17(1)(d) of the Act in Form FL-3. The Brewery was carrying 

on the manufacturing of beer and bottling of beer in bond, under the said 

Licences. 

3. The Excise Inspector in-charge of the Brewery maintains a Register of 

manufacture and issue of beer in Form B-16. The Excise Inspector is 

required to examine the accounts of the brewery and take stock of the beer in 

hand in the brewery, on the last working day of every calendar month (prior 

to 19.7.1975, such examination was required to be done at the end of each 

quarter) after all the issues for that day are made. If he found that the actual 

quantity of beer in stock in the brewery was less than the quantity shown in 

 3

the stock account, but the deficiency did not exceed 9%, he had to disregard 

the same as allowance upto 9% was permitted to cover the losses due to 

evaporation, sullage and other contingencies. But where the deficiency 

exceeded 9%, he was required to enquire into the cause and submit a report 

of the result to the Excise Commissioner in that behalf. The Excise Inspector 

in-charge, was accordingly sending reports to the Excise Commissioner 

whenever there was excess wastage in the case of the first respondent 

brewery. The Excise Commissioner issued show-cause notice giving 

opportunity to the Brewery to explain the excess wastage. After considering 

the explanation, the Excise Commissioner found that there was no 

satisfactory explanation and made ten orders between 26/28.6.1966 and 

24.11.1973 in regard to excess `manufacturing wastage' during the period 

September, 1963 to March, 1973, and levied and demanded in all 

`81,94,310/- as excise duty and an equal amount as additional duty in regard 

to the deficiency in excess of 9% of the total stock of beer (10% prior to 

19.7.1975). The said orders were challenged by the first respondent by filing 

a revision before the state government. The state government by order dated 

12.4.1978 dismissed the revision petition and upheld the demands by the 

Excise Commissioner. 

 4

4. The first respondent challenged the orders of the Excise 

Commissioner and the state government in Civil Misc. Writ Petition 

No.3968 of 1978. A Division Bench of the High Court allowed the said writ 

petition with other connected petitions by a common order dated 15.3.2002. 

It quashed the revision order dated 12.4.1978 and directed the state 

government to decide the revision afresh "after calculating the stock of beer 

for the purpose of original Rule 53 of UP Brewery Rules 1961 (Para 912 of 

UP Excise Manual as it then existed) and section 28-A of the UP Excise Act, 

when after filtration the same has assumed the shape as a finished product 

which is normally consumed by human beings as beverage or drink". In 

short the High Court has held that the point at which the liquor 

manufactured by the brewery was exigible to duty was at the stage, when the 

beer is capable of being consumed by human beings as a beverage, comes 

into existence and the deficiency should be worked out with reference to 

measurement at such stage. The High Court rejected the contention of the 

appellants that as soon as wort along with yeast is received in the fermenting 

vessels and ferments, the process of manufacture is complete. Feeling 

aggrieved by the decision of the High Court, the appellant has filed this 

appeal. 

 5

Contention of Parties

5. The State contends that the liquor becomes exigible to duty when the 

wort (processed extract of malt) along with yeast is received in the 

fermenting vessels and ferments. It is contended that as the wort is placed in 

the fermentation tanks and the yeast is added to it, fermentation starts 

immediately with the conversion of sugar into alcohol. After the addition of 

yeast when alcohol is first formed, the liquid in the fermentation tank 

becomes alcoholic liquor for human consumption. It is pointed out that 

Entry 51 of List II of Seventh Schedule uses the words "alcoholic liquor for 

human consumption" and not "alcoholic liquor fit for human consumption" 

and therefore, beer is `manufactured' when the fermenting agents are added 

to the wort and fermentation process commences. The State contended that 

excise duty is leviable on the manufacture and production of goods; and that 

the stage at which it should be imposed, the manner of collection thereof and 

the rate at which it is to be imposed, are matters within the discretion of the 

State. It is lastly submitted that the power to impose a tax or duty implicitly 

carries with it the power to provide against evasion thereof. It is submitted 

that what is in issue is not levy of excise duty, but the validity of measures 

introduced to identify the unauthorised or illegal diversion of beer resulting 

in evasion of excise duty. 

 6

6. The case of the state government as put forth in the counter affidavit 

to the writ petition is extracted thus: Wort is passed into the fermentation vat 

and fermenting yeast are added to the wort by a simultaneous process. As 

soon as the wort along with yeast is received in the fermenting vessels or 

fermenting vat, it ferments and process of manufacture of beer is complete. 

It is gauged to find out its quantity and this quantity is entered in the resister 

in Form B-4. In the said register in Form-B4 the dip and gravity of the wort 

is taken. As fermentation starts simultaneously the quantity determined by 

dip and gravity is taken to be beer produced. On the register in Form B-4 the 

Brewers put in their initials. It is denied that process of manufacture of beer 

ends when sullage and yeast calls are removed by filtration. In fact quantity 

of yeast and sullage filtered out may vary from one filtration to another in 

different process. Even after filter beer contains both some yeast and sullage 

and petitioner cannot say that he is only entitled to pay excise duty on such 

quantity after excluding all such yeast and sullage. The filtration is only a 

process to make it more marketable in this competitive business but could 

not be part of manufacture. The event of excisable article going into human 

consumption has no connection with the taxable event in the case of excise 

duty and excise duty is imposed at the stage of manufacture of goods and not 

at the stage of excisable article going into human consumption. 

 7

7. The Brewery contended that the stage for levy and realisation of 

excise duty on beer was the stage of issue of beer from the brewery/bottling 

bonded warehouse after complying with the statutory provisions and 

regulations prescribed for bottling and issue for sale. It was submitted that 

no excise duty could be imposed prior to the stage of occurrence of the 

excisable event, namely the issue of beer from the brewery/bottling bonded 

warehouse for sale and human consumption. Alternatively, it was submitted 

that beer manufactured was exigible to duty at the time or stage when the 

finished product (beer) is received in the storage/bottling tanks, after 

filtration and not at any earlier stage of manufacturing process. It is 

submitted that the system of collection of excise duty on beer, does not 

permit levy or realisation of any amount by way of excise duty or fine on the 

quantity of beer which is wasted in the manufacturing process before it 

become exigible to excise duty. It is contended that the legislative 

competence to levy excise duty under Entry 51(a) of List II of Seventh 

Schedule to Constitution of India is with reference to `alcoholic liquors for 

human consumption'. As the wort solution cannot be described as alcoholic 

liquor for human consumption at the stage of fermentation and filtration, the 

state government cannot levy any excise duty or additional duty equal to 

excise duty, in regard to wastage which occurs with reference a material 

 8

which is not `alcoholic liquor for human consumption'. It is contended that 

the levy of excise duty/additional duty by the Excise Commissioner was on 

the deficiency, that is, the difference between the quantities of wort and 

finished product (beer), which comprises of the scum, yeast cells brought on 

top of fermenting wort, carbon-di-oxide evolved, sullage etc., settled at the 

bottom of vats which impurities are to be eliminated before beer could be 

said to be manufactured or could be described as an alcoholic liquor for 

human consumption. It is contended that the Excise authorities had 

calculated the deficiency in the stock of beer in a wrong manner; and that 

while taking stock of beer in the brewery, for the purpose of calculating the 

allowance the authorities have taken the product at an intermediate stage in 

the process of manufacture instead of taking stock of the finished product. 

8. The relevant contentions of the Brewery in the writ petition are 

extracted below : 

(i) The process of manufacturing beer ends when the sullage and yeast 

cells are removed by filtration and fermentation ceases and the manufactured 

bulk beer is ready to be transferred : (a) for bottling in bond; and (b) to 

casks for sale and human consumption as draught beer. [Vide para 8 of the 

WP].

 9

(ii) The method adopted by the Excise department in working out the 

deficiency in stock is erroneous. What was required under paragraph 912 of 

Excise Manual was to compare the stock of manufactured beer as mentioned 

in the stock account of beer and the actual stock of beer giving allowance for 

the quantity issued. What has been done in the instant case is to assume 

certain quantity as part of the stock account of beer which was not beer and 

was undergoing the process of manufacture into beer. Similarly the quantity 

of beer issued from the Brewery has not been taken in its entirety to be the 

quantity of beer issued. The quantity issued has been equated with the 

quantity actually bottled with the result that the quantity of beer which has 

been wasted in the process of bottling has been treated to be part of the stock 

of beer in the beer account. [Vide para 61]

(iii) If the quantity of beer which is actually issued for bottling from the 

brewery is taken into account in its entirety for purposes of the stock 

account, the percentage of deficiency between the stock account of beer and 

the actual quantity of beer found on physical verification will be below 10% 

[Vide para 63]. 

(iv) What is being subjected to the levy of penalty or penal duty before 

becoming a manufactured saleable article is the deficiency between the wort 

and the finished beer for sale, comprising of scum and yeast cells brought on 

top of fermenting wort, carbon dioxide evolved, sullage etc. settled at the 

bottom of vats which impurities have to be eliminated etc. before beer could 

become saleable. Thus what has not come to exist as such saleable goods 

cannot be termed as excisable article. [Vide para 93(b)]"

 10

Questions for consideration 

9. On the contentions urged, the following two questions arise for our 

consideration: 

(i) At what stage does the beer manufactured is exigible to duty?

(ii) Whether the procedure adopted by the appellants for ascertaining 

 excess manufacturing wastage (excess deficiency) is proper?

To appreciate these issues and find answers to the questions, it is necessary 

to refer to the process of manufacture of beer, the relevant provisions of the 

UP Excise Act, 1910 (For short `the Act') and the relevant Brewery Rules. 

Process of manufacture of Beer

10. Encyclopaedia Britannica (15th Edition, Vol.14, Page 739) describes 

the stages of brewing process thus : 

 "Beer production involves malting, milling, mashing, extract separation, 

 hop addition and boiling, removal of hops and precipitates, cooling and 

 aeration, fermentation, separation of yeast from young beer, aging, 

 maturing, and packaging. The object of the entire process is to convert 

 grain starches to sugar, extract it with water, and then ferment it with yeast 

 to produce the alcoholic, lightly carbonated beverage." 

As the description of the brewing process given in Encyclopaedia Britannica 

is detailed and very lengthy, we have opted for the following shorter and 

simpler description of the brewing process given in Wikipedia 

 11

(http://en.wikipedia. org/wiki/Beer) which is in consonance with what is 

stated in Encyclopaedia Britannica : 

 "The process of making beer is known as brewing. A dedicated building 

 for the making of beer is called a brewery......The purpose of brewing is 

 to convert the starch source into a sugary liquid called wort and to convert 

 the wort into the alcoholic beverage known as beer in a fermentation 

 process effected by yeast.

 The first step, where the wort is prepared by mixing the starch source 

 (normally malted barley) with hot water, is known as "mashing". Hot 

 water (known as "liquor" in brewing terms) is mixed with crushed malt or 

 malts (known as "grist") in a mash tun. The mashing process takes around 

 1 to 2 hours, during which the starches are converted to sugars, and then 

 the sweet wort is drained off the grains. The grains are now washed in a 

 process known as "sparging". This washing allows the brewer to gather as 

 much of the fermentable liquid from the grains as possible. The process of 

 filtering the spent grain from the wort and sparge water is called wort 

 separation. The traditional process for wort separation is lautering, in 

 which the grain bed itself serves as the filter medium. Some modern 

 breweries prefer the use of filter frames which allow a more finely ground 

 grist. Most modern breweries use a continuous sparge, collecting the 

 original wort and the sparge water together. However, it is possible to 

 collect a second or even third wash with the not quite spent grains as 

 separate batches. Each run would produce a weaker wort and thus a 

 weaker beer. This process is known as second (and third) runnings. 

 The sweet wort collected from sparging is put into a kettle, or "copper", 

 (so called because these vessels were traditionally made from copper) and 

 boiled, usually for about one hour. During boiling, water in the wort 

 evaporates, but the sugars and other components of the wort remain; this 

 allows more efficient use of the starch sources in the beer. Boiling also 

 destroys any remaining enzymes left over from the mashing stage. Hops 

 are added during boiling as a source of bitterness, flavour and aroma. 

 Hops may be added at more than one point during the boil. The longer the 

 hops are boiled, the more bitterness they contribute, but the less hop 

 flavour and aroma remains in the beer. 

 After boiling, the hopped wort is now cooled, ready for the yeast. In some 

 breweries, the hopped wort may pass through a hopback, which is a small 

 vat filled with hops, to add aromatic hop flavouring and to act as a filter; 

 but usually the hopped wort is simply cooled for the fermenter, where the 

 yeast is added. During fermentation, the wort becomes beer in a process 

 which requires a week to months depending on the type of yeast and 

 12

 strength of the beer. In addition to producing alcohol, fine particulate 

 matter suspended in the wort settles during fermentation. Once 

 fermentation is complete, the yeast also settles, leaving the beer clear. 

 Fermentation is sometimes carried out in two stages, primary and 

 secondary. Once most of the alcohol has been produced during primary 

 fermentation, the beer is transferred to a new vessel and allowed a period 

 of secondary fermentation. Secondary fermentation is used when the beer 

 requires long storage before packageing or greater clarity. When the beer 

 has fermented, it is packaged either into casks for cask ale or kegs, 

 aluminium cans, or bottles for other sorts of beer."

11. We may next extract the definition of beer, stages of manufacture of 

beer, and the fermentation process described in Chapter XI (Brewing) from 

UP Excise Manual (Volume-V) : 

 "Beer defined - The term `beer' as used in the Indian Excise Law, refers 

 to `fermented, undistilled liquors, of which malt is the primary base, and 

 are flavoured with a wholesome bitter usually hops'. Beer therefore 

 includes ale, beer, black beer, porter, stout, etc., and the precise 

 manufacture of these products is termed "brewing". 

 Lager beers - The beers mentioned above are prepared by what is known 

 as a `top fermentation process; the yeasts employed are designated `top 

 yeasts and the products `top fermentation beers'. In contradistinction to 

 the above, lager beers are prepared by employing `bottom yeasts' and the 

 process is termed `bottom fermentation'. 

 Barley - The fermenting raw material commonly used in production of 

 beers are (a) Barley, (b) Barley Malt (or Malt), (c) other unmalted cereals 

 such as maize or rice, which are employed as grits, broken rice or flakes 

 and maize starch, (d) sugars derived almost exclusively from sugarcane 

 and maize starch, such as, cane sugar, invert, etc. The latter two viz,. (c) 

 and (d) are known as `malt adjuncts' as they partially replace the malt. 

 Manufacture of beer may be considered under the following five 

 stages : 

 (a) Preparation of the malt from Barley.

 (b) Infusion of the ground malt or `grist' and straining the resultant 

 extract or wort.

 13

 (c) Boiling the wort with hops or other bitters, straining of the hops 

 and cooling. 

 (d) Fermenting the wort. 

 (e) Settling, Racking, cellar treatment and bottling. 

Fermentation

Unlike Whisky fermentation, fermentation of beer is conducted in England 

by employing top fermentation yeast and the different systems only differ 

in the flocculation and attenuating power of the yeast employed, while in 

bottom fermentation breweries producing larger beers. The yeast is 

generally mixed with a small quantity of wort at 65 F and poured into the 

incoming wort, or if the yeast required in vogorating, it is allowed to come 

into active fermentation before addition to the fermenting vessel. Yeast 

food, if any is needed is in a few hours is at its height as can be seen by the 

maximum temperature reached and is allowed to continue for 5 to 8 days.

The following description of the practice in India is of interest: 

Pitching of the wort - The fermentation vats usually have a capacity of 

3,000 gallons, which is equivalent to 140 bushels of malt (having a sugar 

content of 40 per cent). The cooled hopped wort from the malt is mixed at 

this stage with 300 lb. of sugar and = lb. of ammonium sulphate followed 

by 60 lb. of yeast in suspension (containing 85 per cent moisture) and 

allowed to ferment for 5-6 days. The peak of the fermentation is reached 

in 36 hours. At the end of the fermentation, the vats are slowly aerated by 

`Sterilized air'. Fermentation of beer is conducted by employing top 

fermentation yeast. This and the atmosphere of CO on the top of the vat 

prevent any bacteria gaining access to the beer. The fermentation is carried 

on until the gravity of the wort falls down to 1.042, when the wort is run 

off into fining vessels so as to settle and clarify. Throughout the 

fermenting stage the temperature of the wort is regulated by coils of piping 

called at temperature through which cold water is passed.

Fermentation of lager beers. - Bottom fermentation processes used for 

lager beer differ from top fermentation adopted for ales in that the 

temperature ranges between 41 degree Fahrenheit and 56 degree 

Fahrenheit, while the yeast settles as a firm black cover at the bottom of 

the fermenting vessel. The primary fermentation also lasts for 7 to days at 

the higher temperature or 12 to 14 days at lower temperatures as the rate 

of fermentation is considerably slower than in top fermentation systems. 

Bottom fermentation beer is usually lagered or stored for periods varying 

from 1 to 9 months (generally 6 to 8 weeks) after this primary 

fermentation during which slow changes called `maturation' occur and 

this gives the name to the beer. Fermentation in the storage stage is due to 

primary yeasts carried down with the beer from the fermenting vessel.

 14

 Gasing, Racking and Bottling - Although lager beer is ultimately filtered 

 before racking into casks, clarification is an essential function of the 

 storage. 

 Uncarbonated top fermentation beers, which include the bulk of British 

 draught ales are either racked directly from the fermenting vessel or 

 settling back to which they are run down from Fermenting vessels. The 

 settling back provides a means of further clarification by sedimentation 

 during 2 to 12 hours. This is also used for addition of primings, colourings 

 and sometimes finings though these are sometimes added to individual 

 casks. The beer loses carbon dioxide and gets aerated. Dry hops are also 

 sometime added to the settling backs. Racking in cylinders and counter 

 pressure racking is also followed." 

12. The first respondent describes (in Annexure-I to the writ petition) the 

process of manufacturing beer in its brewery thus:

 "The Process of Manufacturing of Beer - Coarsely crushed barley malt 

 termed "grist" added with cooked maize and rice clakes is boiled at a 

 specific temperature in treated water in the vessel called mashtun by 

 which the starches present in the grain are converted into sugars. The 

 extract from the grain called wort is drawn into another vessel called 

 `copper' to which hops flowers and sugar is added and boiled with the 

 purpose of sterilizing the wort, separating wastable proteins in the form of 

 precipitate, dissolving bittering constitutents of hops and imparting 

 aromatic flavour of hops flowers. The spent hops are separated from the 

 boiled wort which is cooled and passed into fermentation vats. 

 Brewers yeast is "pitched" to initiate fermentation. The fermentation is 

 carried on at low temperature. Lot of frothing takes place, the yeast cells 

 multiply and bring up dirty heads with resins of hops etc., at the top which 

 are cleared out, the convertible sugars are decomposed into alcohol and 

 carbon dioxide gas; the hanging particles in the wort settled down with 

 coagulated albuminous substances and yeast cells during the process of 

 fermentation which is carried on for 8 to 10 days. 

 The fermented wort is racked into settling tanks or storage tanks leaving 

 the sullage or sludge at the bottom of fermentation vats. At this stage also 

 (i.e. in storage vats) some yeast cells are present in the fermented wort and 

 secondary fermentation takes place besides some residuary particles in the 

 bulk of fermented wort settling at the bottom of the storage vats. 

 15

 To eliminate secondary fermentation and haze from this, it is passed 

 through filter machines in which 100 to 150 filter sheets are fixed. The 

 filterate is transferred to bottling tanks for bottling beer in a separate 

 bonded warehouse, which is carried on under the supervision of the 

 officer-in-charge of the warehouse." 

13. It is thus evident that the process of brewing beer involves malting, 

mashing, boiling, fermentation, separation of yeast from the beer, ageing and 

finishing. The fermented alcoholic liquor that can be identified as `beer' 

comes into existence on completion of the process of fermentation. Ageing 

is carried out only in the manufacture of certain types of beer, by storing 

beer in storage tanks for certain period. Filtration removes the remaining 

yeast (the major portion settles as sediment in the fermentation vats and is 

removed as sullage) and then packed into barrels, bottles or cans. The 

filtration, ageing and finishing are processes to remove impurities, improve 

the clarity, taste and increase shelf life.

Relevant provisions of the Act and the Rules

14. The relevant provisions of the UP Excise Act, 1910 are extracted 

below : 

 "Section 3 (3a). "Excise duty" and "countervailing duty" means any such 

 excise duty or countervailing duty, as the case may be, as is mentioned 

 Entry 51 of List II in the Seventh Schedule to the Constitution;

 Section 3 (10). "Beer" includes ale, stout, porter and all other fermented 

 liquor made from malt; 

 16

Section 3 (22a). "Excisable article" means - (a) any alcoholic liquor for 

human consumption; or (b). any intoxicating drug;

Section 28 Duty on excisable articles-(1) 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 in accordance with the provisions of Section 12 (1); or

 (b) exported in accordance with the provisions of Section 13; or

 (c) transported; or

 (d) manufactured, cultivated or collected under any licence granted 

 under Section 17; or

 (e) manufactured in any distillery established or any distillery or 

 brewery licensed, under Section 18:

x x x x x x 

Section 28A - Imposition of additional duty in certain cases - (1) 

Where the quantity of spirit or beer in a brewery is found, on examination 

by such officer of the Excise Department as may be authorised by the 

Excise Commissioner in this behalf to exceed the quantity in hand as 

shown in the stock account, the brewery shall be liable to pay duty on such 

excess at the ordinary rates fixed under Section 28.

(2) Where the quantity of spirit or beer is less than that shown in the stock 

account on such examination and deficiency exceeds ten per cent; 

(allowance to that extent being made to cover losses due to evaporation, 

sullage and other contingencies within the brewery, and also to cover loss 

in bottling and storage) the Excise Commissioner shall levy an additional 

duty at the rate of one hundred per cent of ordinary rates of duty in respect 

of such deficit as exceeds ten per cent over and above the ordinary rates of 

duty."

Section 29. Manner in which duty may be levied - Subject to Such 

rules, as the Excise Commissioner may prescribe to regulate to the time, 

place and manner of payment, such duty may be levied in one or more of 

the following ways as the State Government may by notification direct:

(a) to (d) ...(omitted as not relevant)

(e) in the case of spirit or beer manufactured in any distillery established 

or any distillery or brewery licensed under Section 18 -

 17

 (i) by a rate charged upon the quantity produced or issued from the 

 distillery or brewery, as the case may be, or issued from a 

 warehouse established or licensed , under Section 18 (d);

 (ii) by a rate charged 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 :

 Provided that, where payment is made upon issued of an excisable article 

 for sale from a warehouse established or licensed under Section 18(d), it 

 shall be at the rate of duty which is in force on that article on the date 

 when it is issued from the warehouse."

15. Rule 53 of the UP Brewery Rules, 1961 (Paragraph 912 of the Excise 

Manual) as it stood prior to substitution of the rule on 19.7.1975 provided 

for quarterly examination of stock and read as follows: 

 "912. Quarterly Examination of Stock. - The accounts of a brewery and 

 the stock of beer in hand in the brewery shall be examined by the Assistant 

 Excise commissioner once a quarter. If the quantity of the beer in stock in 

 the brewery on such examination be found to exceed the quantity shown 

 as in hand in the stock account, the brewer shall be liable to pay duty on 

 such excess at double the rate prescribed for ordinary issue. If the quantity 

 be found less than that shown in the stock account, the cause of the 

 deficiency shall be inquired into and the result reported to the Excise 

 Commissioner, who may direct the levy of a fee not exceeding double the 

 amount represented by the duty on such deficiency. Provided that any 

 deficiency not exceeding 10. per cent, shall be disregarded, allowance to 

 the extent being made to cover loss in bulk due to evaporation, sullage and 

 other contingencies within the brewery. This allowance Shall be calculated 

 upon the amount represented by the actual ascertained balance in hand at 

 the date of the last stock taking, together with the total quantity since 

 manufactured or received, as shown in column 2 and 3 of the register of 

 manufacture and issue (form B-16).

Rule 53 of the Brewery Rules (para 912 of the Excise Manual) as substituted 

on 19.7.1975 reads as under:

 18

 "912. On the last working day of every calendar month after all the issues 

 for that day are made, the Officer-in-charge shall examine the accounts of 

 brewery and take the stock of beer in hand in the brewery. if the quantity 

 of the beer in stock in the brewery on such examination be found to 

 exceed the quantity shown as in hand in the stock account the brewer shall 

 be liable to pay duty on such excess at the rate prescribed for ordinary 

 issue if the quantity be found less than that shown in the stock account and 

 such deficiency does not exceed nine per cent of the total stock of beer in 

 the month the same may be disregarded allowances to that extent being 

 made to cover losses due to evaporation, sullage and other contingencies 

 within the brewery. But if the deficiency in stock be found to exceed nine 

 per cent the cause shall be enquired into and the result reported to the 

 Excise Commissioner who may direct the levy of duty on such deficiency 

 as may be found in excess of nine percent at the rate prescribed for 

 ordinary issue. This nine per cent free allowance shall be calculated up on 

 the quantity represented by the actual ascertained balances in hand at the 

 close of the last stock taking together with the total quantity since 

 manufactured or received, as shown in columns 2 and 3 of the register of 

 manufacture and issue (Form B-1).

Rule 37 of the Brewery Rules (para 896 of the Excise Manual) reads thus: 

 "896. Worts to be drawn off in the order of production: All worts shall 

 be removed successively, and in the customary order of brewing to the 

 under back, coppers, coolers and fermenting vessels, and shall not be 

 removed from the last named vessel until an account has been taken by the 

 officer incharge or until after the expiry of twenty four hours from the 

 time at which the worts are collected in these vessels."

Rule 41 of the Brewery Rules (para 900 of Excise Manual) deals with issue 

of beer and is extracted below: 

 "900. Beer not to be issued until duty paid or bond executed - 

 [Rule 41]. No beer shall be removed from a brewery until the duty 

 imposed under section 28 of the UP Excise Act, 1910 (Act No.IV of 1910) 

 has been paid or until a bond under section 19 of the Act in Form B-7 or 

 B-8 has been executed by the brewer for export of beer outside the State, 

 direct from the brewery.

 19

Legal position enunciated by this Court

16. We may next refer to the decisions of this Court bearing on the issue 

in R.C. Jall Parsi vs. Union of India [AIR 1962 SC 1281], this court held :

 "Excise duty is primarily a duty on the production or manufacture of 

 goods produced or manufactured within the country. It is an indirect duty 

 which the manufacturer or producer passes on to the ultimate consumer, 

 that is, its ultimate incidence will always be on the consumer. Therefore, 

 subject always to the legislative competence of the taxing authority, the 

 said tax can be levied at a convenient stage so long as the character of the 

 impost, that is, it is a duty on the manufacture or production, is not lost. 

 The method of collection does not affect the essence of the duty, but only 

 relates to the machinery of collection for administrative convenience. 

 Whether in a particular case the tax ceases to be in essence an excise duty, 

 and the rational connection between the duty and the person on whom it is 

 imposed ceased to exist, is to be decided on a fair construction of the 

 provisions of a particular Act."

 (emphasis supplied) 

17. In Synthetics and Chemicals Ltd. vs. State of U.P. [1990 (1) SCC 

109], this Court held that the expression "alcoholic liquor for human 

consumption" must be understood in its common and normal sense. The 

expression "consumption" must also be understood in the sense of direct 

physical intake by human beings and not utilisation in some other forms for 

the ultimate benefit of human consumption and the expression is intended to 

mean "liquor which as it is, could be consumed, in the sense of capable of 

being taken by the human beings as such as a beverage or drink".

 20

18. In State of U.P. vs. Delhi Cloth Mills [1991 (1) SCC 454], this Court 

dealing with section 28 of UP Excise Act, 1910 considered the question 

whether the excise authorities were entitled to levy excise duty on the 

wastage of liquor (military rum) in transit and held that the levy of 

differential duty (that is charging up the duty on the report of excess 

wastage) did not cease to be an excise duty even if it was levied on 

declaration of excess wastage. The taxable event was still the production or 

manufacture. This Court observed: 

 "A duty of excise under Section 28 is primarily levied upon a 

 manufacturer or producer in respect of the excisable commodity 

 manufactured or produced irrespective of its sale. Firstly, it is a duty upon 

 excisable goods, not upon sale or proceeds of sale of the goods. It is 

 related to production or manufacture of excisable goods. The taxable event 

 is the production or manufacture of the liquor. Secondly, as was held in A. 

 B. Abdulkadir v. The State of Kerala - AIR1962SC922, an excise duty 

 imposed on the manufacture and production of excisable goods docs not 

 cease to be so merely because the duly is levied at a stage subsequent to 

 manufacture or production. That was a case on Central Excise, but the 

 principle is equally applicable here. It does not cease to be excise duty 

 because it is collected at the stage of issue of the liquor out of the distillery 

 or at the subsequent stage of declaration of excess wastage. Legislative 

 competence under entry 51 of List II on levy of excise duty relates only to 

 goods manufactured or produced in the State as was held in Bimal 

 Chandra Banerjee v. State of Madhya Pradesh - 1970 (2) SCC 467. In the 

 instant case there is no dispute that the military rum exported was 

 produced in the State of U.P. In State of Mysore and Ors. v. M/s D. 

 Cawasji & Co. - 1970 (3) SCC 710, which was on Mysore Excise Act, it 

 was held that the excise duty must be closely related to production or 

 manufacture of excisable goods and it did not matter if the levy was made 

 not at the moment of production or manufacture but at a later stage and 

 even if it was collected from retailer. The differential duty in the instant 

 case, therefore, did not cease to be an excise duty even it was levied on the 

 exporter after declaration of excess wastage. The taxable event is still the 

 production or manufacture............

 21

 ......Rules 636 and 814 are also of regulatory character and they are 

 precautionary against perpetration of fraud on the excise revenue of the 

 exporting state. If out of the quantity of military rum in a consignment, a 

 part of portion is claimed to have been wastage in transit and to that extent 

 did not result in export, the State would, in the absence of reasonable 

 explanation, have reason to presume that the same have been disposed of 

 otherwise than by export and impose on it the differential excise duty. A 

 statute has to be construed in light of the mischief it was designed to 

 remedy. There is no dispute that excise duty is a single point duty and may 

 be levied at one of the points mentioned in Section 28."

19. In Mohan Meakin Ltd. vs. Excise & Taxation Commissioner, H.P. 

[1997 (2) SCC 193], this Court examined the question as to when beer is 

exigible to excise duty under the Punjab Excise Act, 1914 and Punjab 

Breweries Rules 1932. This Court held that Beer would mean fermented 

liquor from malt, when it is potable or in consumable condition as beverage. 

The state of levying excise duty upon alcoholic liquor arises when excisable 

article is brought to the stage of human consumption with the requisite 

alcoholic strength thereof and it is only the final product which is relevant. 

In that case, the levy of excise duty at the stage when the manufacturing of 

the beer was at wort stage was challenged. This Court posed the question: 

Whether the levy of excise duty, on beer when it was in the process of 

manufacture is correct? This Court answered the question thus : 

 "The levy of excise duty is on alcoholic liquor for human consumption, 

 manufacture or production. At what stage beer is exigible to duty is the 

 question. The process of manufacture of beer is described as under:

 22

 The first stage brewing process is the feeding of Malt and 

 adjuncts into a vessel known as Mash Tun. There it is mixed with 

 hot water and maintained at certain temperature. The objective of 

 this process is to convert the starches of the malt into fermentable 

 sugar.

 The extract is drawn from the Mash Tun and boiled with the 

 addition of hops for one to two hours after which it is 

 contrifuged, cooled and received in the receiving wats. At this 

 stage, it is called "Wort" and contains only fermentable sugars 

 and no alcohol. After this it is transferred to the fermentation 

 tanks where Yeast is added and primary fermentation is carried 

 out at controlled temperature. After attenuation (Diminution of 

 density of "Wort" resulting from its fermentation) is reached for 

 fermented wort is centrifuged and transferred to the storage vats 

 for secondary fermentation. After secondary fermentation is over 

 in the storage vats, it is filtered twice-first through the rough 

 filter press and then through the fine filter press and received in 

 the bottling tanks. It is in bottling tanks that the loss of the 

 Carbon Dioxide Gas is made up and bulk beer is drawn for 

 bottling. It is filed into the bottles and then last process of 

 pasteurisation is carried out to make it ready for packing and 

 marketing. Till the liquor is removed from the vats and 

 undergoes the fermentation process as mentioned above the 

 presence of alcohol is nil.

Excisable article would mean any alcoholic liquor for human consumption 

or any intoxicating drug. The levy or impost of excise duty would be only 

on alcoholic liquor for human consumption or for being produced in the 

brewery. Beer would mean fermented liquor from malt, when it is potable 

or in consumable condition as beverage. It is seen that the levy is in terms 

of entry 51 of List II of the Seventh Schedule which envisages that duties 

of excise on the 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.

Thus, the final product of the beer is relevant excisable article exigible to 

duty under Section 31 of the Act when it passes through fine filter press 

and received in the bottling tank. The question is : at what stage the duty is 

liable to be paid? Section 23 specifically envisages that until the payment 

of duty is made or bond is executed in that behalf as per the procedure and 

acceptance by the Financial Commissioner, the finished product, namely, 

the beer in this case, shall not be removed from the place at which finished 

product was stored either in a warehouse within factory premises or 

precinct or permitted place of usage. Under these circumstances, the point 

at which excise duty is exigible to duty is the time when the finished 

 23

 product, i.e., bear was received in bottling tank or the finished product is 

 removed from the place of storage or warehouse etc."

 (emphasis supplied)

20. In Government of Haryana vs. Haryana Brewery Ltd. [2002 (4) 

SCC 547], this Court held :

 "We agree with the contention of Mr. Divan, and this is also not disputed 

 by Mr. Anand, that the State has jurisdiction to levy excise duty only on 

 beer after it has been brewed and has become fit for human consumption. 

 This is the settled position as laid down by this Court in Mohan Meakin 

 and Modi Distillery cases. The only question which, to our mind, really 

 arises for consideration is how to determine the quantity of beer which is 

 manufactured on which the excise duty is to be levied. Section 32 gives an 

 answer to this question. The first part of the Section states that subject to 

 the rules which may be made by the Financial Commissioner, Excise Duty 

 is to be levied, inter alia, on the excisable article manufactured in or 

 issued from a distillery, brewery or warehouse. A reading of this Section 

 leaves no manner of doubt that the stage at which excise duty can be 

 levied is only after the process of manufacture has been completed and in 

 fact, it is to be levied when it is issued from the distillery, brewery or 

 warehouse."

 (emphasis supplied) 

Re: Question No. (i)

21. The High Court has held that the point at which the liquor 

manufactured by the brewery is exigible to excise duty is the stage when the 

finished product (beer) capable of being consumed by human beings as a 

beverage or drink, comes into existence that is, after the process of 

fermentation and filtration. In Synthetics and Chemicals Ltd & Ors. vs. 

State of U.P. & Ors. - 1990 (1) SCC 109 and State of U.P. vs. Modi 

Distillery & Ors. - 1995 (5) SCC 753, this Court held that having regard to 

 24

Entry 51 of List II of Seventh Schedule to the Constitution, the State would 

be authorized to impose excise duty on alcoholic liquor for human 

consumption which meant that the liquor, as itself, was consumable in the 

sense that it was capable of being taken by human beings as such as a 

beverage or drink. This Court in Government of Haryana vs. Haryana 

Breweries Ltd. & Anr.. - 2002 (4) SCC 547, held that State has jurisdiction 

to levy excise duty on beer only after it has been brewed and has become fit 

for human consumption; and having regard to section 32 of the Punjab 

Excise Act, 1914, the stage at which excise duty could be levied on beer was 

after the process of manufacture was complete and when it is issued from the 

brewery or warehouse. 

22. This Court also reiterated the said position in Mohan Meakin Ltd. vs. 

Excise & Taxation Commissioner, H.P. - 1997 (2) SCC 193 but further 

observed that beer would be exigible to duty when it passes through the fine 

filter press (after fermentation) and is received in the bottling tank. The 

words `received in the bottling tank' obviously referred to beer being 

received in any container or vessel for storage, after fermentation and 

filtration. It may however be noted that the said observation that beer is 

exigible to excise duty only when it passes through the fine filter press 

 25

would apply only to the standard types of beer which is sold in bottles and 

cans. Beer is also supplied in casks and barrels, taken directly from 

fermentation vessels without undergoing any filtration or further processing, 

known as Draught (or Draft) beer. Such beer is unpasteurized and unfiltered 

(or even if filtered, only in a limited manner and not fine filtered like beer 

intended to be sold in bottles or cans). Para 29 of Excise Manual (Vol.V 

Chapter XI) notes that uncarbonated top fermentation beer, which include 

draught beer are racked directly from the fermenting vessel. Thus when the 

fermentation process of wort is completed, it becomes an alcoholic liquor for 

human consumption and there is no legal impediment for subjecting beer to 

excise duty at that stage. Therefore, the State has legislative competence to 

levy excise duty on beer either after the completion of the process of 

fermentation and filtration, or after fermentation.

23. Section 29 (e)(i) of the Act makes it clear that in the case of beer 

manufactured in a brewery, excise duty may be levied, by a rate charged 

upon the quantity produced or issued from the brewery or issued from a 

warehouse. This means that in respect of beer that undergoes the process of 

filtration, the exigibility to excise duty will occur either at the end of 

filtration process when it is received in storage/bottling tanks or when it is 

 26

issued from the brewery. In regard to draught beer drawn directly from 

fermentation vessels, without further processing or filtration, the exigibility 

to excise duty will occur either at the end of fermentation process or when it 

is issued from the brewery.

Re: Question No.(ii)

24. The High Court rejected the Brewery's contention that only such beer 

which comes to the `bottling tank' after filtration, can be treated as 

`manufactured beer' and exigible to excise duty and wastage allowance 

could be given only with reference to such beer which has become a finished 

product. But the High Court allowed the writ petition of the Brewery and 

directed that validity of the demand should be decided afresh, "after 

calculating the stock of beer for the purpose of original Rule 53 of UP 

Brewery Rules, 1961 (Para 912 of UP Excise Manual as it then existed) and 

section 28A of UP Excise Act, when after filtration the same assumes the 

shape as a finished product which is normally consumed by human beings 

as a beverage or drink". The real question arising for consideration in this 

case is not about the stage at which beer is exigible to excise duty, but 

whether the procedure adopted by the appellant for ascertaining the excess 

 27

wastage (or shortage in quantity) and levying duty and additional duty 

thereon, is legal and valid.

25. The contention which ultimately found favour with the High Court, 

was based on legislative competence. The brewery contended that section 

28A provided for levy of `excise duty' and an equal amount as additional 

duty on `excess wastage' or shortage in quantity manufactured; that the 

legislative competence to levy excise duty is derived from Entry 51 of List II 

of Seventh Schedule to the Constitution : "Duties of excise on .......(a) 

alcoholic liquors for human consumption"; that therefore, if excise duty or 

additional duty is to be levied under section 28A, the article that could be 

subjected to duty should be `an alcoholic liquor for human consumption'; 

that the term `alcoholic liquor for human consumption' means a liquor 

which could be taken by a human being `as it is' without the need for any 

further process; and that in regard to beer, that stage is reached only after 

fermentation and filtration processes are completed. It was submitted that 

before filtration, the product-in-process was not an alcoholic liquor for 

human consumption and therefore there was no legislative competence to 

levy excise duty or additional duty on such product-in-process.

 28

26. This contention ignores the fact that Entry 51 should be read not only 

as authorizing the imposition of an excise duty, but also as authorizing a 

provision which prevents evasion of excise duty. This Court in Baldeo Singh 

vs. CIT - 1961 (1) SCR 482, held as under : 

 "......Under Entry 54 a law could of course be passed imposing a tax on a 

 person on his own income. It is not disputed that under that entry a law 

 could also be passed to prevent a person from evading the tax payable on 

 his own income. As is well known the legislative entries have to be read 

 in a very wide manner and so as to include all subsidiary and ancillary 

 matters. So Entry 54 should be read not only as authorizing the imposition 

 of a tax but also as authorizing an enactment which prevents the tax 

 imposed being evaded. If it were not to be so read, then the admitted 

 power to tax a person on his own income might often be made infructuous 

 by ingenious contrivances. Experience has shown that attempts to evade 

 the tax are often made." 

 (emphasis supplied)

27. In this context, we may also consider the decision of this Court in 

Union of India vs. A. Sanyasi Rao and others - 1996 (3) SCC 465, this Court 

considered the constitutionality of the provisions for presumptive tax in 

sections 44-AC and 206-C of the Income Tax Act, 1961 for collecting tax on 

profits and gains from trading in alcoholic liquor for human consumption 

(and other goods specified therein) at the stage of purchase on a presumptive 

basis. The respondents therein contended that the said sections lacked 

legislative competence as income tax was a tax on income, while the levy 

under section 44-AC was one on purchase when no income had occurred 

 29

and that the tax was on a hypothetical income and not real income. This 

Court held that the object in enacting sections 44-AC and 206-C was to 

enable the Revenue to collect the legitimate dues of the State from the 

persons carrying on particular trades, in view of the peculiar difficulties 

experienced in the past and the measure was so enacted to check evasion of 

substantial revenue due to the state. Trade or business, results in or produce 

income, which can be brought to tax. In order to prevent evasion of tax 

legitimately due on such `income', section 44-AC and section 206-C were 

enacted, so as to facilitate the collection of tax on that income which is 

bound to arise or accrue, at the very inception itself or at an anterior stage 

and therefore one cannot contend that the aforesaid statutory provisions 

lacked legislative competence. After all, statutory provisions obliging to pay 

`advance tax' were not new and sections 44-AC and 206-C were similar. 

The standard by which the amount of tax was measured, being the purchase 

price, would not in any way alter the nature and basis of the levy viz., 

that the tax imposed was a tax on income and it could not be labelled 

as a tax on purchase of goods. The charge for the levy of the income that 

accrued or arose is laid by the charging sections viz., sections 5 to 9 and 

not by virtue of section 44-AC or section 206-C. The fact that the income 

was levied at a flat rate or at an earlier stage will not in any way 

 30

alter the nature or character of the levy since such matters are completely in 

the realm of legislative wisdom. What is brought to tax, though levied with 

reference to the purchase price and at an earlier point is nonetheless income 

liable to be taxed under the Income Tax Act. This Court referring to the 

argument about absence of legislative competence to levy tax before accrual 

of income, referred to Entry 82 of List I of Seventh Schedule ("Taxes on 

income other than agricultural income") and held as under : 

 "...the word `income occurring in Entry 82 in List I of the Seventh 

 Schedule should be construed liberally and in a very wide manner and the 

 power to legislate will take in all incidental and ancillary matters including 

 the authorization to make provision to prevent evasion of tax, in any 

 suitable manner." 

28. To ensure that there is no evasion of excise duty in regard to any beer 

manufactured, the State is entitled to make a provision to prevent evasion of 

excise duty being evaded, though it is leviable at the stage of issue from the 

brewery. The beer brewing process shows once the wort ferments, it 

becomes consumable, though the manufacturing process to have a finished 

product may in some cases require filtration, aging carbonization etc. To 

ensure that there is no evasion of excise duty by diversion of beer (excisable 

article) before it becomes a finished product, section 28A of the Act has 

been enacted and that is implemented by Rule 53 of the Brewery Rules, and 

 31

Rule 7 of the Bottling Rules. The Excise Inspector in-charge is required to 

take physical stock of the beer in hand in the brewery periodically (once a 

quarter prior to the amendment of 1975 and once in a month from July 1975) 

by dip and gravity of the quantities in the fermentation vessels. We may 

illustrate the method adopted to ascertain whether there is any excess 

manufacturing wastage (or illegal siphoning of beer) before it reaches the 

bottling tanks : 

a. The opening balance (actual quantity) 1000 Litres

b. Quantity brewed during the month under survey 2600 Litres

c. Total stock of beer (a + b) in the brewery 3600 Litres

d. Quantity of beer issued during the month 2600 Litres

e. Balance quantity in hand as per stock account (c - d) 1000 Litres

f. Actual balance found on physical examination 600 Litres 

g. Wastage in manufacture (difference between quantity shown

 in stock account and actual quantity in the brewery) 400 Litres

h. Wastage allowable at 9%* of the total stock of 

 beer in the month(3600 litres) under Rule 53 of Brewery 324 Litres

 *(9% is the allowance towards losses due to evaporation, sullage and other 

 contingencies within the brewery). 

 i. Excess wastage chargeable to duty & addl. duty (g + h) 76 

 Litres 

 32

29. It should be noted that recourse to section 28A of the Act will be held 

only when there is abnormal deficiency or shortage in the actual quantity in 

the brewery when compared to the quantity mentioned in the stock account, 

that is more than 9%, which would show evasion of excise duty. The 

standard procedure of levying excise duty is not on the quantity of excisable 

article in the fermentation vessels. The standard procedure is to levy excise 

duty when the beer is removed from the brewery. The State was thus 

collecting excise duty in the usual course with reference to the beer after the 

entire manufacturing process was completed when it is removed from the 

brewery. It resorted to section 28A, Rule 53 of Brewery Rules and Rule 7 of 

Bottling Rules and levied double the amount of excise duty (excise duty plus 

equal amount as additional duty) only in those months when the periodic 

examination showed excessive manufacturing `wastage'. The procedure 

adopted was the most logical process to ensure that excisable articles were 

not clandestinely removed and to ensure that there is no evasion of excise 

duty having regard to the brewing procedure. If the actual stock assessed is 

less than the stock as per Stock Account and the difference is less than 9%, 

the difference was ignored. Only if the difference exceeded 9%, the quantity 

in excess of 9% was treated as the excess wastage and excise duty and an 

equal amount as additional duty was charged in regard to such excess. For 

 33

this purpose necessarily the quantity in the fermentation vessels had to be 

considered. If the quantity in the bottling tanks are to be taken as the basis, 

then there will be no way of finding out whether there was any siphoning off 

from the fermentation vessel or during filtration process. Fermented wort is 

beer and it could be removed from fermenting vessels or during storage or 

filtration. Therefore, the base measurement is taken in the fermentation 

vessel and 9% standard allowance is provided to cover losses on account of 

sullage etc. 

30. The Act provides that levy of excise duty on beer can not only be with 

reference to the quantity produced and issued from a brewery, but can also 

be by calculating 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. This means the excise duty on the beer manufactured can be 

levied not only with reference to the actual quantity issued or removed, but 

can also be by a rate charged in accordance with a scale of equivalent, 

calculated on the quantity of materials used or by the degree of attenuation 

of the wash or wort prescribed by the State Government. The said alternative 

method of levying excise duty does not depend upon the actual quantity 

manufactured or issued. It is with reference to the deemed quantity 

 34

manufactured rather than the actual quantity manufactured. Such a 

procedure has been in vogue in England and it is permissible in India. Rule 

42 of Chapter XI of the Excise Manual (Vol. 5) gives a detailed description 

of the attenuation method of charging duty on beer and it is extracted below:

 "42. The attenuation method of charging duty on beer. - In the United 

 Kingdom, the duty is levied on beer in proportion to the original gravity of 

 the wort. Really speaking, the Excise control of breweries is much less 

 stringent than in the case of distilleries. No excise locks are used. The 

 constant presence of an officer is only considered necessary in the case of 

 every large breweries working continuously. The safety of the revenue 

 depends on notices of all essential operations which are required to be 

 given to the Excise. The length of notice to be given depends on the 

 importance of the particular operation and on the facility with which the 

 local officer can attend. One officer is, in general, in charge of a group of 

 the smaller breweries. 

 A brewer must give timely notice of - 

 (1) his attention to brew; 

 (2) the nature and amount of materials to be used; 

 (3) the time at which he expects his mash-tun to be drained (this is to 

 enable the officer to take a dip of the drained grains which must lie 

 for two hours after draining or until the officer arrives). 

 (4) his intention to mix the products of one or more brewings;

 (5) any modification in his routine methods of brewing;

 (6) any alterations he proposes to make in the position etc., of his 

 brewing vessel; 

 (7) Finally and most important of all, the brewer is required to give 

 notice to the officer of his intention to `collect beer', ie., he must 

 intimate as closely as possible the time when the wort will be ready 

 for pitching with yeast. When the wort is collected for 

 fermentation the brewer must forthwith take the specific gravity 

 with his saccharometer and also the dip, in order that the density 

 and gallonage may be recorded in case the officer does not attend. 

 In cases where the officer attends before fermentation has 

 materially affected the gravity he is able to verify these figures and 

 above all to see that they have been recorded properly by the 

 brewer. 

 35

 In order that his control may be effective, the officer must time his visits 

 to the brewery so as to arrive when fermentation has not advanced too far 

 for check and so that the brewer has had reasonable time to make his 

 entries of gravity and gallonage. If having had reasonable time, the brewer 

 has failed to make his entry this omission is treated as a serious excise 

 offence. 

 It may be asked why stress is not laid on the necessity for the attendance 

 of the officer at the time of pitching the wort. This, bowever, is generally 

 impracticable seeing that usually brewers `collect' at the same hour and 

 that the presence of the officer at more than one brewery is impossible. 

 This being so, his visits must be unexpected, the responsibility for honest 

 declaration of gravity and dip being imposed on the brewer. The brewer's 

 records, if confirmed by the officer, are thus the basis on which the duty is 

 levied." 

31. This Court in Haryana Brewery Ltd. (supra) recognized the alternative 

method of calculating the quantity of beer manufactured to be valid. This 

Court held: 

 "The proviso to Section 32 uses the expression "provided that duty may be 

 levied....." Clause (b) of the proviso state that the calculation of the beer 

 manufactured would be according to such scale or equivalents calculated 

 on the quantity of materials used or by the degree of attenuation of the 

 wash or wort. The opening part of Clause (b) of the proviso indicates as to 

 how the beer manufactured is to be determined. The proviso is only a 

 manner of computing the end-product with reference tot he raw material 

 which has been used in the input. The tax is on the end-product and not on 

 the raw material. What this proviso read with Rule 35 indicates that in 

 order to determine what is the quantity of beer manufactured which is fit 

 for human consumption, after all the processes have been gone through, 

 you seen what is the quantity of raw material which has been utilised for 

 the manufacture of beer and in the process of manufacturing give an 

 allowance for wastage of 7 per cent. After doing this, you determine the 

 quantity of beer manufactured. An example which has been given is that a 

 1000 kgs. Of malt should ordinary yield 6500 litres of beer. By giving an 

 allowance of wastage which must occur during the process of the 

 manufacture of the end-product and limiting that allowance to 7 per cent, 

 the quantity of beer manufactured on which excise duty would be levied 

 would be 6500 litres less 7 per cent. 

 36

 14. It appears to us that the proviso to Section 32 read with Rule 35 does 

 nothing more than to give a rough and ready method of calculating the 

 quantum of beer which should have been manufactured in the normal 

 process which is calculated on the basis of the raw material used. The 

 idea, perhaps, is that full quantity of beer which is manufactured is 

 accounted for. It will be seen that registers are maintained by the 

 manufacturer and the figures are taken from there. From the records of the 

 manufacturer, excise authorities will be able to ascertain the quantum of 

 raw material used. It is open to the excise authorities to accept the figure 

 indicated in the records of the manufacturer of the total quantity of beer 

 manufactured. Duty can be levied on this and this would be inconsonance 

 with the first part of Section 32. It is, perhaps, only to cross-check whether 

 the figure which is indicated in the books of the manufacturer is correct 

 that a formula can be used for determining the amount of beer which could 

 or should or must have been manufactured. This is by taking into account 

 the quantity of raw material used, the quantity which is in the process and 

 as entered in the brewing book and from there giving an allowance of 7 

 per cent for wastage. It appears to us that the allowance of 7 per cent has 

 to be in arriving at the figure of the manufactured beer as loss of quantity 

 during the process of manufacture. It cannot be that on the figure of 

 manufactured beer, arrived at on the basis of the books of the respondent, 

 an allowance of 7 per cent has then to be given. If the figure taken for the 

 purpose of calculating the excise duty is only of the end-product, viz., the 

 beer produced, and not the quantity of raw material used in the 

 manufacture of beer during which loss of some quantity as wastage would 

 have occurred, there cannot be a deduction of any sum or proportion as 

 wastage from the quantity of end-product in order to arrive at the quantity. 

 The excisable product is the quantity of beer produced and not the quantity 

 produced, and thus excisable, minus 7 per cent."

Therefore there is nothing wrong in adopting the procedure prescribed in 

section 28A and Rule 53 of Brewery Rules to determine the excess 

manufacturing wastage.

32. The Brewery wants the wastage allowance to be given, not with 

reference to the quantity in the fermentation tank, but with reference to the 

quantity in the storage/bottling tanks (after completion of fermentation and 

 37

filtration process) when the manufacturing process is complete and only 

bottling remains. The argument of the respondent is that the measurement 

should be taken only when the manufacture is complete and not when it is 

still in the process of manufacture; and the manufacture process is completed 

not when the wort is in the fermentation tank but only when the filtration 

process is finished. But this contention ignores the fact that when 

manufacturing process is complete and the beer has reached storage/bottling 

tanks, there is no question of any manufacturing loss. The allowance of 9% 

is made to cover loss due to evaporation, sullage and other contingencies 

within the brewery. 9% is allowed as loss in quantity because the quantity in 

fermentation tank is measured and taken as the base and thereafter the 

sullage/yeast heads are removed as sediment in the fermentation vessels or 

by the filtration process and there will also be certain amount of evaporation 

during the process of filtration, racking and storage etc. In fact, the Brewery 

specifically admits this position in Annexure-I to the writ petition while 

describing the process of manufacturing beer : 

 "From the above brief description of manufacturing process, it will be 

 observed that the deficiency between the quantity of wort to the point 

 when beer is ready for bottling, occurs because of elimination of 

 impurities" viz., yeast cells and dirty heads brought up in fermentation at 

 top, evaporation taking place; carbon dioxide evolved out; and sullage 

 settled at the bottom. The quantity of these impurities accounting for the 

 said deficiency in the process of manufacture cannot be taken as beer and 

 excisable article for purposes of levy of duty. For culmination of these 

 38

 impurities and other contingencies mentioned of in rule 912, an allowance 

 of 10% is fixed." 

33. If the quantity measured after the fermentation and filtration 

processes should be the base figure, for purpose of allowance to cover loss 

on account of sullage, evaporation etc., there will be no need for granting 

any allowance because once it have passed the filtration stage the sullage 

and other impurities has been removed and the beer is ready for being filled 

in barrels, casks or bottles. The 9% allowance is for the wastages occurring 

during the stages of fermentation and filtration and not in regard to the 

stages between storage after filtration and removal. The Brewery has 

virtually mixed up the issue relating to the question as to when beer is 

exigible to excise duty with the question as to the quantity on which the 

allowance of 9% should be granted. As noticed above, a combined reading 

of rules 37 and 53 of Breweries Rules, with or without section 28A make it 

clear that the allowance of 9% as losses in the brewery (10% as losses in the 

course of manufacture in the brewery prior to 1975) is with reference to the 

quantity in the fermentation tank and not with reference to the quantity of 

beer in the storage/bottling tanks after filtration. 

 39

34. We may now consider the contention on behalf of brewery that they 

are entitled to allowance upto 9% towards such wastage from the quantity 

measured in the storage/bottling tanks after fermentation and filtration. We 

extract below the contention of the Brewery in this behalf from its writ 

petition: 

 "(X) That section 28A(2) in so far as it purports to provide for 

 permissible wastage could operate only from the stage the State 

 Government became competent to impose excise duty/additional duty and 

 till beer is brought to such a stage that it is rendered fit for human 

 consumption, the State Legislature has no legislative competence to levy 

 excise duty/additional duty and hence the State Legislature cannot take 

 into consideration for the purposes of levy of excise duty/additional duty 

 any wastage prior to the stage when the liquor/beer becomes fit for human 

 consumption."

A large allowance up to 9% of the total stock of beer has been provided 

towards wastage, only to cover the loss occurring from fermentation stage to 

post-filtration stage, as the quantity has been calculated with reference to the 

fermentation vats and there will be considerable wastage due to sullage and 

evaporation. Rules 37 and 53 of the Breweries Rules (paras 896 and 912 of 

the Excise Manual) also proceeded on that basis that the measurement would 

be with reference to the quantities in the fermentation vessels taken by dip 

and gravity method. 

 40

35. In fact, the brewery describes the nature of these losses in the brewery 

in Annexure I to the writ petition (in the connected WP No.1375/1978) as 

under:

 "MANUFACTURING LOSSES

(i) Varying constituents of Malt viz. percentage of proteins etc. produced 

sludge or sullage in more or less quantity. Thus sullage to be removed will have 

differing percentages.

(ii) Depending on the process - top and bottom fermentation etc. there 

may be more or less of scum and dirty heads containing yeast cells to be removed, 

thus losses will be variable at this stage.

(iii) The removal of solids is continuously carried on at different stages in 

the manufacturing process. With frequency of the centrifugal machines or the 

Filtration Plants having to be opened depending upon the quantity and turbidity of 

the fermented wort or green beer to be cleared off to be sparklingly clear, the 

losses will be more or less. With the banking of import of quality filter sheets, the 

indigenously made filter sheets have to be used which are to be more frequently 

changed then the imported ones. There are losses in absorption in filter sheets and 

leakage at ends of plates.

(iv) Some quantity of fermenting wort is lost in removal of scum and dirty 

heads and in removal of sullage from the bottom of the tanks.

(v) Every time the fermenting or fermented wort or green beer is 

transferred by means of pipes, what is left over in pipes has to be drained off, 

water and steam is run in pipes to sterilize them, so that there may be no 

contamination to spoil beer.

 The varying losses at each stage in the manufacturing process are natural and 

 unavoidable. With the above mentioned variable losses, accidental, off chance 

 occurrence or those losses which are incidental to the process of manufacture 

 are provided for in rule 912 under "Contingencies".

 The contingent losses, a few of which are given below, make the losses in 

 manufacturing process vary and erratic.

 41

(a) Due to failure of electricity and refrigeration, there may be brisk 

fermentation and wild bacterial infection, which may make it sour to be turned 

into vinegar, or if more spoilt, may have to be destroyed.

(b) By sudden leakage of brine coiled pipes, the fermenting wort may be 

mixed up with brine which becomes unpalatable and has to be destroyed. 

(c) With haziness persisting after filtration once, it may have to be treated 

with approved chemicals and refiltered.

(d) Bursting of transfer pipes, leakage of valves etc."

36. If the quantity measured in the storage/bottling tanks (after filtration) 

should form the basis, there was no occasion or need for making a huge 

allowance of 9% for sullage, evaporation and other contingences, as there 

would be no sullage, evaporation or other wastages after that stage (that is 

completion of manufacture) and the allowance under Section 28A of the Act 

will become redundant, except for the small percentage provided for wastage 

during bottling and storage. 

37. The Brewery placed strong reliance upon the decision of this Court in 

State of U.P. vs. Modi Distillery & Ors. - 1995 (5) SCC 753. In that 

decision, this Court was considering the validity of demand for excise duty 

on the wastage of high strength spirit (80% to 85%) during transportation in 

containers from distillery to warehouse (referred to as `Group B' cases). 

This Court held : 

 42

 "In other words, ethyl alcohol (95 per cent) was not an alcoholic liquor for 

 human consumption but could be used as a raw material or input, after 

 processing and substantial dilution in the production of whiskey, gin, 

 country liquor etc. In the light of experience and development, it was 

 necessary to state that `intoxicating liquor' meant only that liquor which 

 was consumable by human beings as it was. 

 What the State seeks to levy excise duty upon in the Group 'B' cases is the 

 wastage of liquor after distillation, but before dilution; and, in the Group 

 'D' cases, the pipeline loss of liquor during the process of manufacture, 

 before dilution. It is clear, therefore, that what the State seeks to levy 

 excise duty upon is not alcoholic liquor for human consumption but the 

 raw material or input still in process of being rendered fit for consumption 

 by human beings. The State is not empowered to levy excise duty on the 

 raw material or input that is in the process of being made into alcoholic 

 liquor for human consumption."

The said decision will not assist the first respondent - brewery as that was a 

case of levy of excise duty on raw materials or inputs which were still in 

process. That matter related to distilled alcohol and not fermented beer. The 

wastage considered by this Court was all with reference to alcohol that had 

not been diluted and therefore was not `alcoholic liquor for human 

consumption'. This Court held that the State is not empowered to levy duty 

on the raw material or inputs that is in the process of being made into an 

alcoholic liquor for human consumption. The position is different here. 

When the quantity of the liquid in the fermentation vessels were measured, 

on account of fermentation, the liquid was already in the process of 

 43

conversion into an `alcoholic liquor for human consumption', though had 

not become a finished product of beer. Therefore, the principles in Baldev 

Singh and A. Sanyasi Rao, will apply and not the decision in Modi Distillery. 

Therefore we hold that there is no infirmity in the method adopted by the 

excise department to arrive at the excess wastage or in making a demand for 

excise duty and additional duty in regard to such excess wastage.

Re : CA No.4709 of 2002 :

38. The question arising in this appeal is the same as in CA No.4708 of 

2002 and the facts are also similar to the facts of CA Nos.4708 of 2002. The 

only difference in facts is that the demand in this case related to the period 

3.6.1970 to 5.9.1972 and the amount of duty/additional duty that was 

demanded was Rs.1,40,596.89. For the reasons stated in CA No.4708/2002, 

this appeal is also allowed.

Re : CA Nos.4710, 4711, 4712, 4713 of 2002

39. All these four appeals relate to demands made upon the breweries for 

duty on excess wastage in bottling and storage of beer. The first appellant 

brewery has described the process of bottling of beer thus (in Annexure P2 

to the writ petition - WP No.1375/1978):

 44

 "Before carbonated beer is conveyed to the automatic bottling machine 

 through pipes, the whole line is cleaned and sterilized to ensure that there 

 are no wild bacteria which may spoil the beer passed through these pipes.

 Bottles which are cleaned and sterilized in Automatic Bottle Washing 

 Plant, are fed by conveyors to the beer bottling machine. While the bottles 

 are filled, some quantity of beer is spilt by foaming which takes place and 

 with pressure of Co gas bottles burst in the process of bottling. The beer 
 2

 which is spilt is mixed with broken glass pieces, oil etc. on the conveyor 

 belts. It is contaminated and has to go waste.

 To increase the shelf life of beer, the filled bottles are placed in 

 pasteurization tanks and the water in which these bottles are immersed is 

 gradually raised to temperature of 65O and after keeping these bottles for a 

 fixed time in hot water, these are cooled down. 

 With the expansion of Co gas during this process some bottles burst and 
 2

 the beer contained therein gets mixed up with water. 

 Leaky bottles are also taken out from the pasteurization tanks, which are 

 decanted for reprocessing of their contents. Some wastage occurs in the 

 process of decanting.

 After pasteurization of filled bottles, capsuling, labeling and packing is 

 done, in which some bottles break. During the process of bottling what 

 goes waste in spilling as mentioned above, in unavoidable. It does not 

 exist in the form of goods for sale and human consumption. Thus being 

 not an excisable article is not leviable with duty."

The Breweries have also described the various instances of bottling wastages 

in the writ petition as under : 

 "BOTTLING WASTAGES

 The wastages occur at different stages in bottling process as under: 

 (a) Loss of beer in transfer pipe from Bottling Tank to bottling 

 machine, which has to be washed away to sterilize pipes before bottling 

 operations are began every day.

 45

 (b) There being pressure of CO gas in beer there is loss by bursting of 
 2 

 bottles in filling and capping machines. With the pressure of gas foaming 

 takes place and there is spillage of beer between the bottling and capping 

 machines. The spilt beer cannot be recovered as it gets mixed up with oil 

 on the conveyor belts and is contaminated.

 (c) There are some breakages on conveyors between capping machine 

 and pasteurization tanks.

 (d) During pasteurization the filled bottles are immersed in water and 

 the temperature of water is gradually raised to about 650C after keeping 

 for a fixed time, it is gradually colled, with the expansion of gas the bottles 

 burst to a varying percentage depending on the varying quality of bottles 

 from mould to mould and batch to batch and beer is mixed with water in 

 the tanks. 

 (e) Some breakages do occur in capsuling, labelling and packing of 

 filled bottles. 

 (f) Sometimes rebottling may have to be done and loss on this account 

 may occur.

40. The appellant breweries are holding bottling licences in form No.FL3 

to bottle beer, governed by the U.P. Bottling of Foreign Liquor Rules, 1969 

(`Bottling Rules' for short). Rule 6 provides that every licence granted in 

Form No. FL3 shall be subject to the conditions enumerated therein. Rule 7 

enumerates the additional special conditions applicable to bottling of India 

made liquor in bond under FL3 licence. Sub-rules (10) and (11) of Rule 7 

are relevant for our purpose and they are extracted below :

 "7. Following additional special conditions will be applicable to 

 bottling of Indian Made Foreign liquor in bond under F.I.-3 licence:

 (1) to (9) x x x x x omitted as not relevant 

 (10) On the last working, day of every calendar month, after all the 

 transactions for that day are made, the Excise Inspector Incharge shall 

 46

 take the stock of unbottled and bottled spirit 3rd beer/stored in the 

 bottling warehouse, enter into the prescribed registers and ascertain the 

 wastage of spirit in the bottling operations and storage in the bonded 

 warehouse.

 (11) (a) An allowance up to one per cent may be made on the total 

 quantity of spirit and beer stored during a month for actual loss in 

 bottling and storage. The licensee shall be responsible for the payment 

 of duty on wastage in excess of one per cent,

 (b) when the wastage does not exceed the prescribed limit, no action 

 need be taken by the Excise Inspector Incharge but if an excess is 

 found at the time of monthly stock taking the Excise Inspector shall 

 submit a statement to the Collector by the fifth day of the month in 

 Form F.L.B. 10 showing the quantity of actual wastage and the duty to 

 be paid by the licensee on the excess wastage. On receipt of the 

 statement the Collector shall recover the duty from the licensee at the 

 full rate of duty leviable on Indian made foreign spirit and beer."

41. The appellants contended that section 28A provides for an allowance 

of 10% to cover losses due to evaporation, sullage and other contingencies 

within the brewery and also to cover losses in bottling and storage. Rule 53 

of the Brewery Rules as amended on 19.7.1975 (Rule 912 of the Excise 

Manual) provides for an allowance of 9% of the total stock of beer in the 

month to cover losses due to evaporation, sullage and other contingencies 

within the brewery. Rule 7(11)(a) of the Bottling Rules provides for an 

allowance up to one per cent of the total stock of spirit during a month, for 

actual loss in bottling and storage. The appellants submitted that section 28A 

did not make such a division of 10% allowance, into 9% for loss in the 

brewery and one percent for loss in bottling; and that therefore it is 

 47

impermissible to divide the wastage under two separate heads of 9% 

wastage to cover losses due to evaporation, sullage and other contingencies 

within the brewery under rule 53 of the Brewery Rules, (para 912 of U.P. 

Excise Manual) and only one percent for losses in bottling and storage under 

the Bottling Rules. According to them the wastage in bottling can itself go to 

an extent of 10%. At all events, if the total wastage due to evaporation, 

sullage and other contingencies in the brewery and the total wastage in 

bottling and storage, together did not exceed 10%, no duty or additional duty 

could be levied on the assumption that the losses in bottling and storage was 

restricted only to one percent, as such division would be contrary to section 

28A of the Act.

42. Rule 53 of Brewery Rules made in 1961 (para 912 of the Excise 

manual) before the amendment on 19.7.1975 provided for allowance of a 

deficiency not exceeding 10% to cover losses in bulk due to evaporation, 

sullage and other contingencies within the brewery. At that time a separate 

licence for bottling was not contemplated. The Bottling Rules made in 1969 

provided for an allowance of one percent loss in bottling and storage. On 

19.7.1975, Rule 53 (para 912 of Excise manual) was substituted and the 

allowance to cover losses due to evaporation, sullage and other 

 48

contingencies within the brewery was reduced to 9% in view of the 

provision in the Bottling Rules providing for an allowance of one percent for 

losses in bottling and storage. Section 28A was inserted by U.P. Act 9 of 

1978 (with a provision that the section shall be deemed always to have been 

inserted) providing for an allowance to a total extent of 10% in regard to 

losses within the brewery and the losses in bottling and storage. It is not in 

dispute that the process of brewing beer and the process of bottling beer are 

considered to be distinct and separate processes governed respectively by the 

Brewery Rules and Bottling Rules. The operations connected with bottling 

are required to be conducted in a separate premises under a different licence. 

The process of bottling begins with the transfer of bulk beer from the 

brewery for bottling. Sub-section (2) of section 28A refers to an allowance 

to an extent of 10% not only in regard to losses within the brewery but also 

to cover losses in bottling and storage. As noticed above, Rule 53 of the 

Brewery Rules and Rule 7(11) of the Bottling Rules when read conjointly 

show that the said rules are supplementary to each other and together 

implement section 28A of the Act. At all events, the validity of neither Rule 

53 of Brewery Rules nor Rule 7(11) of Bottling Rules is under challenge. Be 

that as it may.

 49

43. The brewery having obtained the bottling licence subject to the special 

conditions which include the condition in Rule 7(11) of the Bottling Rules, 

cannot ignore the said Rule and contend that the allowance for losses in 

bottling could be more than one percent, that is upto ten per cent. In view of 

the above there is no merit in the contention of the breweries that they are 

entitled to allowance of ten per cent towards losses in bottling and storage 

after the excisable article has left the Brewery. The appeals are therefore 

liable to be dismissed.

Conclusion :

44. CA Nos.4708-4709/2002 are allowed and the order of the High Court 

in Civil Misc. WP Nos.3968/1978 and 4043/2008 are set aside and the said 

writ petitions are dismissed.

45. CA Nos.4710, 4711, 4712 & 4713/2002 are dismissed affirming the 

decision of the High Court dismissing C.M. W.P. Nos.1375/1978, 

3690/1979, 4136/1978 and 4157/1978, though for reasons, somewhat 

different from the reasoning of the High Court. 

 .............................J

 (R. V. Raveendran)

 50

 .............................J

 (P. Sathasivam)

New Delhi; September 23, 2011. 

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