By TIOL News Service

MUMBAI, DEC 14, 2017: FACTS: The Petitioners are manufacturers of denatured spirit and have obtained a license for manufacturing under the Rules. The Petitioners claim that they have also obtained the license under the Rules for the re-distillation process of denatured spirit granted by the Government of Maharashtra under the Maharashtra Distillation Spirit and Manufacture of Potable Liquor Rules, 1966. The Petitioners are manufacturers of Ethanol by re-distillation process of denatured spirit. The Ethanol manufactured by the Petitioners is used as ad-mixture in motor spirit. The Petitioners have described denatured spirit as a basic raw material and after extracting water the same is converted into absolute alcohol having purity of 99.5%. The manufacturing process of the denatured spirit is done in the distillery from where the Petitioners have brought the denatured spirit under excise supervision appointed under Condition No.2 of Licence in Form “I”. The Petitioners supply the absolute alcohol in form of denatured, called denatured ethanol to various petrochemical companies either in the State of Maharashtra or outside the State of Maharashtra. The Petitioners also import denatured spirit from outside the State of Maharashtra. Petitioners are also exporting absolute alcohol outside the State of Maharashtra. The Petitioners state that under the Rules they have to obtain a pass issued by Respondent No.3 under 49 and 50 of the Rules for the import and export of denatured alcohol and this is granted only after paying import / export fees mentioned in Rule 52 and 59 of the Rules. The import of denatured spirit is governed by Rules 51 to 56 and the export of denatured spirit is governed by Rules 57 to 62 of the Rules.

The Petitioners have referred to the Industries (Development & Regulation) Act, 1951 as amended in the year 1956 and particularly item 26 of schedule 1 which reads - “26. Fermentation Industries:- 1. Alcohol 2. Other products of fermentation industries,” and submit that by declaration of fermentation Industries in the year 1956, the Union of India has taken alcohol and other products of Fermentation Industries under its control whereby the State has lost the power to make any law in respect of industries declared by the Union under its control to be taken over in public interest. Ethanol which is manufactured by the Petitioners is covered under Item 26 of the First schedule of the Industrial (Development and Regulation) Act, 1951 and hence the State has no powers to take regulatory measures, for manufacture, sale, possession of the industrial alcohol or Fermentation Industry. The Petitioners have claimed that the State has only power to levy duty or fees on alcoholic beverages for human consumption including regulating the rectified spirit, which can be diverted for potable purpose. The power of the State to regulate and control comes to an end, the moment the rectified spirit becomes denatured.

The Petitioners have submitted that the Rule making power of the State under Section 143 of the Act does not empower the State to impose duty upon alcohol which is not for human consumption. This is further made clear by the Constitution of India in Entry No. 51 of List II of Schedule VII and Entry 8 of List II of the VIIth Schedule which enjoins the State to make law in respect of intoxicating liquor. The denatured spirit not being capable of human consumption cannot come under “intoxicating liquor”.

The Petitioners, therefore, challenge the Bombay Denatured Spirit Rules, 1959 (Rules) insofar as they regulate the possession, use, sale, import, export and transport of denatured spirit after denaturation as being ultra vires and unconstitutional.

The Petition also seeks directions that the Petitioners who are manufacturers of denatured spirit do not require license under the Bombay Prohibition Act, 1949 (now Maharashtra Prohibition Act, Act for short) for sale, purchase, transport, possession, storage, dehydration, import, export of denatured spirit under the Act.

The Government Pleader inter alia submitted that the State has a power to take steps to ensure that denatured spirit remains denatured; that there have been several casualties in the case of persons consuming denatured spirit as 'hooch' and since there was no control or regulation over use and sale of denatured spirit, the State had enacted the Rules.

The High Court inter alia observed -

+ The Act recognizes denatured spirit as being incapable of human consumption. This would be so despite denatured spirit falling within the definition of liquor in Section 2 Sub-section (24) of the Act as well as within the definition of spirit in Section 2 Sub-section (43) of the Act.

+ The State power to regulate alcoholic liquors under the Constitution of India in List II item 51 is restricted to alcoholic liquors for human consumption and under List II Item 8 is only to regulate the production, manufacture, possession, transport, purchase and sale of 'intoxicating liquors'.

+ Hence the State has no power to legislate in respect of denatured alcohol which is incapable of human consumption.

+ The Petitioners appear to be aggrieved by Rules 23 to 31 which cover the possession and use of Denatured Spirit and requires a permit for domestic purposes and license for medical purposes of registered medical practitioners. Also by the Rules relating to obtaining wholesale and retail licence for denatured spirit viz. Rules 32 to 47. As well as the Transport Permit Rules viz. Rules 48 to 50 B and the Import Rules (Rules 51 to 56) and Export Rules (Rule 57 to 62) which provide for obtaining pass from the State Government by paying to them import / export fees.

+ It is clear from the various judgments of the Supreme Court commencing from Synthetics and Chemicals (AIR 1990 Supreme Court p.109) that the State has the power to regulate so as to prevent the conversion of alcoholic liquors for industrial use to one for human consumption and for that purpose regulatory fees imposed by the State are justified. It is clearly held that the intoxicating liquor in Entry 8 List II does not cover denatured alcohol which is incapable of human consumption.

+ The Supreme Court has thus drawn a distinction between rectified spirit meant exclusively for supply to industries whether after denaturing it or without denaturing it and the rectified spirit in the process of manufacture or after manufacture being diverted or misused for potable purpose. The Supreme Court has held that the State Government has no power to regulate the former i.e. rectified spirit which is exclusively for supply to industries other than for potable purposes.

+ It is thus clear that the Supreme Court has consistently held that the industrial alcohol after denaturing falls within the exclusive control of the Union.

Noting that the issues referred to the larger bench in State of UP VsLalta Prasad Vaish (2007-TIOL-187-SC-STATE-CX) are different, the High Court observed that the present Petitions are to be decided in the light of the law already laid down by the Supreme Court.

Accordingly, the following order is passed -

++ The Bombay Denatured Spirit Rules, 1959 to the extent that they regulate the possession, use, sale, import, export and transport of denatured spirit viz. Rules 23 to 62 are ultra vires and unconstitutional and are struck down.

++ There shall be no licence required under the Maharashtra Prohibition Act for sale, purchase, transport, possession, storage, dehydration, import and export of denatured spirit.

++ It is clarified that the power of the State Government in the case of rectified spirit supplied for industrial purposes is only to see and ensure that rectified spirit, whether in the course of its manufacture or after its manufacture, is not diverted or misused for potable purpose. The State can make necessary regulations requiring the industry to submit periodical statements of raw material and the finished product (rectified spirits) and is entitled to verify their correctness.

The Writ petitions were allowed in above terms.

(See 2017-TIOL-2579-HC-MUM-MISC)