Certified unfit for drinking. The State still demanded excise duty. It lost.

When a Distillery’s Waste Became a Constitutional Question

M/s Utkal Distilleries Ltd. had a problem that no one in Orissa had faced before. The company had installed an Extra Natural Alcohol Column—the first of its kind in the state—to manufacture Indian Made Foreign Liquor from rectified spirit. During re-distillation, the column produced a waste product: weak spirit, chemically certified as unfit and unsafe for human consumption. The company asked the government what to do with it. A technical committee recommended allowing 2% process loss. The government accepted. Then the state issued demand notices for excise duty on every litre of weak spirit that exceeded that 2% allowance.

At stake: crores in excise duty demands, the viability of a manufacturing process the state had itself approved, and a constitutional line between what the Centre and States can tax.

The Column That Changed the Rules

In 1992, Utkal Distilleries approached the Commissioner of Excise, Orissa, with a technical problem. Its new ENA column generated weak spirit during re-distillation—a by-product that could not be sold, consumed, or reused. The existing excise rules had no provision for such wastage because no one in the state had used this technology before.

A Technical Committee examined the issue. On 21st November 1992, it recommended allowing 2% process loss during re-distillation. The government accepted the recommendation. The company installed the column and began production.

But the state’s excise department did not stop there. It issued demand notices seeking excise duty on weak spirit that exceeded the 2% allowance. The company challenged these demands before the High Court of Orissa in O.J.C. No.8635 of 1994. On 10th January 1995, the High Court directed the state to decide on the Technical Committee’s report within three months. The state did nothing.

More demand notices followed. The company filed three writ petitions—O.J.C. No.9369/1998, W.P.(C) No.3097/2003, and W.P.(C) No.7108/2005—all challenging the state’s power to levy excise duty on weak spirit that chemical analysis confirmed was unfit for human consumption.

What the Chemical Report Actually Said

The weak spirit in question was not a finished product. It was a waste product generated during the re-distillation process. Chemical testing confirmed it contained impurities that made it unsafe for drinking. It could not be sold, consumed, or diluted into potable alcohol.

The company argued that the state’s power to levy excise duty under Entry 51, List II of the Seventh Schedule to the Constitution was limited to “alcoholic liquors for human consumption.” Since the weak spirit was not fit for human consumption, the state had no legislative competence to tax it. The power to tax non-potable alcohol, the company argued, vested exclusively in the Centre under Entry 84, List I.

The state countered that the weak spirit was still “alcoholic liquor” within the meaning of the Bihar and Orissa Excise Act, 1915, and that the state had the power to regulate and tax all intoxicating liquors under Entry 8, List II. The state also argued that the 2% allowance was a concession, not a constitutional limit, and that the company could not claim immunity from duty on wastage beyond that limit.

The High Court’s Answer

On 5th December 2008, a Division Bench of the High Court of Orissa at Cuttack allowed all three writ petitions. The court held that the state could not levy excise duty on weak spirit that was not fit for human consumption. The demand notices were set aside.

The state appealed to the Supreme Court.

The Constitution Bench That Settled the Line

The Supreme Court, in a judgment authored by Justice B.R. Gavai with Justice L. Nageswara Rao concurring, dismissed the state’s appeals on 3rd March 2022.

The Court began by examining the constitutional scheme. Entry 51, List II empowers States to levy “duties of excise on… alcoholic liquors for human consumption.” Entry 84, List I empowers the Centre to levy excise on all goods except “alcoholic liquors for human consumption.” The two entries are mutually exclusive. If the liquor is for human consumption, the State can tax it. If it is not, only the Centre can.

The Court relied on the seven-judge Constitution Bench decision in Synthetics and Chemicals Ltd. v. State of U.P. (1990) 1 SCC 109, which held that State Legislatures have no authority to levy duty or tax on alcohol not meant for human consumption. That power, the Bench held, vests exclusively in the Centre under Entry 84, List I.

The Court also applied State of U.P. v. Modi Distillery (1995) 5 SCC 753, a three-judge Bench decision directly on point. In that case, the Supreme Court had held that the State cannot levy excise duty on wastage of liquor after distillation but before dilution, because such wastage is not alcoholic liquor for human consumption but raw material still in process.

THE TEST: If the alcohol or its by-product is chemically certified as unfit for human consumption, the State cannot levy excise duty on it. The power to tax non-potable alcohol belongs exclusively to the Centre under Entry 84, List I.

Why the Bihar and Orissa Excise Act Didn’t Help the State

The state argued that Section 2(6) of the Bihar and Orissa Excise Act, 1915 defined “excisable article” as “any alcoholic liquor for human consumption.” Since the weak spirit was alcoholic liquor, the state claimed it fell within the definition.

The Court rejected this argument. The definition itself limited “excisable article” to alcoholic liquor for human consumption. The weak spirit was chemically certified as unfit and unsafe for human consumption. It could not be consumed, sold, or diluted into potable alcohol. It was, in the Court’s words, “a waste product generated during the re-distillation process.”

The Court also noted that Section 27(1) of the Act, which empowers the state to impose duty on excisable articles, must be read in light of the constitutional limitation in Entry 51, List II. The state cannot expand its taxing power beyond what the Constitution permits by relying on a statutory definition.

The Obiter That Might Matter Later

In reproducing the relevant paragraphs from Synthetics and Chemicals, the Court noted that Entry 8, List II—which empowers States to regulate intoxicating liquors—is distinct from the taxing power under Entry 51, List II. Even regulatory authority, the Court observed, is subject to the Industries Development and Regulation Act enacted by the Centre under Entry 52, List I.

This observation, though not necessary for the decision, could be significant in future cases where States attempt to regulate industrial alcohol manufacturing under the guise of excise regulation. The Court’s reminder that regulatory power is not unlimited may give ammunition to manufacturers challenging State overreach.

What This Means for Practitioners

For advocates advising distilleries and alcohol manufacturers, this judgment is a clean, two-step analysis:

Step one: Determine whether the alcohol or by-product in question is fit for human consumption. If chemical analysis confirms it is not, the State cannot levy excise duty on it.

Step two: If the State has issued demand notices on non-potable alcohol, challenge them on constitutional competence grounds. The State’s power under Entry 51, List II is limited to alcoholic liquors for human consumption. Everything else falls under Entry 84, List I.

For CFOs and founders in the distillery business, the takeaway is operational: get chemical certification for every by-product and waste stream. If the certificate says “unfit for human consumption,” the State cannot tax it. Keep the certificate ready. It is your best defence against excise demands.

The Bottom Line

The Supreme Court has reaffirmed a constitutional line that has been clear since Synthetics and Chemicals in 1990: the State cannot levy excise duty on alcohol that is not meant for human consumption, and a distillery’s waste product that is chemically unfit for drinking falls squarely outside the State’s taxing power.