Imposition of Provincial Excise Duty on Manufacturing of Spirit

Imposition of Provincial Excise Duty on Manufacturing of Spirit Approbate and Reprobate Case Laws Challenge to Show Cause Notice Constitutional Law Discrimination and Juristic Person Estoppel Excise Fundamental Rights Government Duties Industrials Intelligible Differentia Interpretation - Preamble Interpretation - Tax Law Interpretation of Statutes Knowledge - Constitutional Law Lahore High Court Legislative Policy Litigation & Arbitration Presumption Rules of Business Solutions - Constitutional Law Tax Mr. Justice Muhammad Sajid Mehmood Sethi in his judgment has decided the issue regarding imposition of provincial excise duty on manufacturing of spirit in Writ Petition No. 18345 of 2012.

1. This single judgment shall dispose of instant petition under Article 199 of the Constitution of the Islamic Republic of Pakistan, 1973 (“Constitution”) as well as connected Writ Petitions which have been heard together as common questions of law and facts have been raised therein.

2. Petitioner in the instant case and petitioners in above-referred connected petitions, are companies engaged in the business of manufacturing and sale of sugar, and inter-alia, produce molasses and other by-products. From molasses, ethanol, commonly known as spirit, is extracted. Petitioner is licensed to manufacture said product under the Punjab Excise Act, 1914 (“Act, 1914”). On 03.07.2012, Secretary Excise & Taxation, Government of the Punjab, Excise & Taxation Department, upon the powers having been exercised by the Governor of the Punjab, in terms of section 31 of the Act, 1914, issued Notification No.S.O.TAX(E & T)3-4/2012 (“impugned Notification”) and imposed duty at the rate of Rs. 2 per liter on manufacturing of spirit in any distillery or brewery, w.e.f. 01.07.2012.

3. On the stamp of impugned Notification, Excise & Taxation Officer / respondent No.5 issued Show Cause Notice dated 10.07.2012 (“SCN”), whereby petitioner was required to explain his failure to pay said duty and was warned that in case of failure, said duty would be recovered from petitioner by adopting coercive measures. Through instant writ petition, petitioners have challenged aforesaid provisions of law, notification and subsequent SCN, with the following prayer:

“In view of the above, it is most respectfully prayed that the impugned levy and demand of tax in terms of show cause notice as well as the impugned levy in terms of Notification dated 03.07.2012 may kindly be declared to be illegal, without lawful authority, and of no legal effect.

It is further prayed that Section 31 of the Punjab Excise Act, 1914 read with Section 3(6) and 3(14) thereof as applied to the Petitioner may kindly be declared to be ultra vires the Constitution and thus illegal, without lawful authority and of no legal effect.

It is further prayed that pending disposal of writ petition the respondents be restrained from recovering the impugned amount of tax from the Petitioner.

It is further prayed that pending disposal of the writ petition, proceedings/operation of the impugned Show Cause Notice may kindly be suspended and the respondent No.5 be restrained from taking any coercive measure against the petitioner.”

4. Mr. Ali Sibtain Fazli, Advocate, learned counsel for petitioners submits that product manufactured by petitioners is not spirit rather it is ‘ethanol’; that even otherwise, the word ‘spirit’, as defined in section 2(19) of the Act, 1914, means any liquor containing alcohol manufactured by distillation whether denatured or not, which means it has to be a liquor containing alcohol and not alcohol simplicitor; that ethanol is alcohol having formula as C2H5OH; that it cannot be consumed as it is not a drink and being pure alcohol it is poisonous and not drinkable; that ethanol/spirit being manufactured by petitioners does not fall in any of the items listed in Section 31 and excisable articles mentioned in Section 3(6) of the Act; that ethanol/spirit also does not come within the definition of liquor as provided in Section 3(14) of the Act for the reason that ethanol / spirit is a distilled alcoholic drink or volatile liquid obtained by distillation, therefore, it is not an excisable article and no duty can be imposed on it.

5. Learned counsel for petitioners contends that levy of excise duty under section 31 of the Act, 1914, read with sections 3(6) and 3(14), is unconstitutional because in terms of Article 142 of the Constitution, Provincial Assembly can only legislate in respect of matters which have not been listed in the Federal Legislative List of the Fourth Schedule of the Constitution, and, against Entry No.44 of the Federal Legislative List, it is mentioned that excise duty can be levied by Parliament on all goods except alcoholic liquors, opium and other narcotics. The provincial legislature can levy duty on alcoholic liquor and not on alcohol; therefore, petitioners’ product, being pure alcohol, is exempted from levy of excise duty under the Act, 1914. Learned counsel for petitioner has relied on Hirjina & Co. v. Islamic Republic of Pakistan and another (1993 SCMR 1342). He has also placed reliance on the judgment rendered by Indian Supreme Court in case of Synthetics and Chemicals Ltd. and others v. State of U.P. and others ((1990) 1 Supreme Court Cases 109). He further argues that impugned Notification is also violative of Article 142 read with Entry No.27 in the Fourth Schedule of the Constitution, according to which Provincial Legislature has no jurisdiction to legislate on inter-provincial trade and commerce as well as trade and commerce with foreign countries. He adds that most of the ethanol produced by petitioners is exported out of Pakistan and, therefore, Provincial Government cannot impose any tax on such goods as it is not within the legislative domain of the Provincial Legislature.

Learned counsel for petitioners challenges the vires of Section 31 of the Act, 1914, read with Section 3(6) and 3(14) of the Act and Notification dated 03.07.2012 issued on the strength of Section 31 ibid, allegedly being violative of Article 151 of the Constitution. It is argued that as per said Article, Parliament is empowered to impose restrictions on freedom of trade, commerce or intercourse between one Province and another or within any part of Pakistan and Provincial Assembly or a Provincial Government is not vested with such powers. He submits that imposition of duty @ Rs.2/- per liter on manufacture of spirit in Punjab tantamounts to impose restriction on free trade and would badly affect the business of petitioner and other manufacturers, as same product would be available in other provinces of Pakistan at cheaper rates and would ultimately affect competitiveness of the product outside Punjab. He adds that by levying impugned duty the respondent-Government has discriminated between the goods produced by the petitioners and the goods produced in other provinces of Pakistan, which is in violation of Article 151(3)(b) of the Constitution. He has relied on Murree Brewery Company Ltd. through Secretary v. Province of Balochistan through Secretary, Excise and Taxation, Quretta and 2 others (2003 PTD 2140), Murree Brewery Co. Ltd. through Manager Tops, M.B.C. v. Province of Punjab through Secretary, Excise and Taxation, Lahore and another (2001 CLC 1842) and Mirpurkhas Sugar Mills Ltd. v. District Council, Tharparkar and 2 others (1990 MLD 317). He submits that Article 151 of the Constitution does not permit the Provincial Assembly to impose tax affecting inter-provincial trade on the ground that said Article is intended to provide facilities or amenities which will improve the flow of trade. He adds that even if such tax is in the larger interest of public as specified in Article 151(4) of the Constitution, it must have consent of the President, but in the instant case no such consent has been sought by respondent-Government. He further submits that tax is a restriction on enjoyment of property and a ‘deterrent against free flow’ of trade. He has placed reliance on Mirpurkhas Sugar Mills Limited v. District Council, Tharparkar through Chairman and 3 others (1991 MLD 715).

Further information regarding imposition of provincial excise duty on manufacturing of spirit can be solicited from AUJ LAWYERS. Feel free to contact us in case you need any clarification and/or require legal assistance regarding similar matters.