Regulating Industrial Alcohol | Day 2: States’ power extends to any liquid with alcohol, not just alcoholic beverages, appellants argue

Dwivedi: There is no conflict between Union and State Lists over control of industrial alcohol

Dwivedi began the day’s arguments by telling the Court that their question from yesterday  gave him a “sleepless night.” On Day 1 of the hearings, Chief Justice D.Y. Chandrachud had stated that the Court was facing a conundrum in assessing delineation of Union and states’ powers between two “overlapping” entries—Entry 52 of the Union List and Entry 8 of the State List. The former gives the Union power to “control” industries (which are otherwise under the control of the state government as per Entry 24 of the State List). The latter gives state governments power to regulate “the production, manufacture, possession, transport, purchase and sale of intoxicating liquors.”

Today, Dwivedi came in armed with answers. He explained that since the 1956 judgement in Ch. Tika Ramji v State of Uttar Pradesh, there is considerable agreement that “Entry 52 (of the Union List) is by itself not a field of legislation.” It “comes alive” when Parliament makes a law to give the Union government power over the activity of a specific industry. This power however, exists only because of Entry 24 of the State List. This Entry gives states power over industry, “subject” to Union’s powers under Entries 7 and 52. This he said creates an “intricate and intimate link between the two” entries.

Now, as Entry 52 of Union lists gets its footing from Entry 24 of State list, the scope of the meaning of industry is as limited for the Union as it is for the State. For “intoxicating liquor,” Dwivedi explained, Entry 24 need not be applied. Entry 8, a specific entry, already exists. Therefore, the Union cannot have control over intoxicating liquor as an industry under Entry 52. 

Dwivedi: Intoxicating liquor is “all liquid containing alcohol”

With that established, Dwivedi moved to what the Chief Justice called “the whole fulcrum” of his argument—that industrial alcohol falls within the scope of “intoxicating liquor” under Entry 8 of the State List. In State of Bombay v F. N. Balsara (1951), a five-judge Constitution Bench found that “intoxicating liquor” included “not only those alcoholic liquids which are generally used for beverage purposes and produce intoxication, but also all liquids containing alcohol.” 

In Synthetics & Chemicals Ltd. v State of Uttar Pradesh (1990), which is under review in this case, the Supreme Court had held that “intoxicating liquors” under Entry 8 of the State List only referred to alcohol that was “fit for consumption.” Dwivedi argued that this was incorrect. “Intoxicating liquor” included alcohol that was either fit or unfit for consumption. This included “denatured alcohol” which refers to alcohol that is adulterated, making it unfit for human consumption. If it was fit for human consumption, the State would retain the power over it under Entry 51. He argued that there is no entry that exclusively regulates “denatured alcohol.” Therefore, naturally, it fell within the state’s jurisdiction under the broad umbrella of “intoxicating liquor” in Entry 8 of the State List. 

Chief Justice Chandrachud further clarified Dwivedi’s position. The bifurcation of legislative competence, he said, only concerned the levying of excise duties, not general regulation of intoxicating alcohol. The Union has the power to impose excise on all “goods manufactured or produced in India,” (under Entry 84 of the Union List) except alcohol for human consumption (Entry 51 of State List). The “substantive power to regulate” industries, the Chief said, is not bifurcated. It remained with the states under the wide umbrella of “intoxicating alcohols” under Entry 8 of State List. There is no specific regulation of alcohol in the Union List at all, except for taxing, he pointed out.

“The beauty of the constitutional division,” he said, is that it gave states “all regulatory powers”, but retained taxing powers with the Union. Dwivedi explained that the reason this provision made its way into the Constitution was because India had just become independent, and the Union government needed funds. 

During the hearing, the Chief asked the Attorney General R. Venkataramani if he was going to be arguing that “intoxicating liquor” only refers to potable alcohol and that Balsara is wrong. Venkataramani answered in the affirmative. Balsara, he said, only concerned the export of alcohol and hence would not apply here.

Datar: Synthetic Chemicals got numerous facts wrong, must be overruled

Datar commenced his arguments by breaking down the process of producing Indian Made Foreign Liquor (IMFL) and ‘Denatured’ Ethyl Alcohol (broadly potable and nonpotable liquor). “We should know how the industry works,” he said. This explanation was aided by a flow chart annexed to the last page of his written submissions.

He submitted that the phrase “industrial alcohol” was a misnomer and the “fountainhead of all confusion” in the case. The accurate phrase  is “denatured spirit.” 

Datar also pointed out that the Union, which in this case is arguing that “intoxicating alcohol” only refers to drinking alcohol, had argued the exact opposite in Synthetic Chemicals. The Union is bound by “executive estoppel,” Datar said. It cannot now change its view per convenience.

He explained that the first fundamental flaw in Synthetic Chemicals was that the Courts mixed up “industrial alcohol” and “rectified spirit” (ethyl alcohol) “which per se is for human consumption.” This would mean that even a rectified spirit meant for human consumption or for use in pharmaceutical products would be out of the states’ control. 

Datar went on to point out other inaccuracies in Synthetic Chemicals. He argued that the Bench was “absolutely wrong” to hold that “rectified spirit is an industrial alcohol and is not potable as such.” 

Further, the Bench held that industries were in need of “potable alcohol, and the denaturants are not required by it” which he explained was an incorrect view. In fact, humans need potable alcohol and industries need denatured spirits, Datar said. 

Moreover, the seven-judge Bench had interpreted “alcoholic liquors for human consumption” in Entry 51 of State List to mean “liquor which as it is consumable, in the sense capable of being taken by human beings such as beverage of drinks.” This was incorrect as “Extra Neutral Alcohol” derived from molasses can technically be consumed as is, without any particular treatment. This shows that Entry 51 doesn’t specifically concern alcohol fit for human consumption but simply capable of being consumed.

Lastly, Datar submitted that contrary to Synthetic Chemicals, state governments had the power to issue “licences to manufacture both potable and non-potable alcohol,” not the Union.

“If these passages are overruled,” the entire law falls in place, he said. 

Datar then relied on the report of the 158th Law Commission of India from 1998 which had recommended amendments in the Industries (Development and Regulation) Act, 1951. He explained that many states approached the Court challenging Synthetic Chemicals. 

The Law Commission had recommended that the Industries Act be amended “in the interest of maintaining balance between the Union and the States, and also with a view to eliminate the room for abuse of law and misuse of alcohol.” It suggested that states be allowed to continue to levy excise duties on alcohol as they did prior to Synthetic Chemicals, and “put an end to the legal wrangling.” “It would also help the states to raise a little more revenue than at present and remove their grievances” it said. 

Datar: A “legal territory” can be drawn at the time of “removal”

According to Datar, all this showed that states clearly enjoyed the power to regulate the manufacturing aspects of alcohol. “Intoxicating alcohol,” he said, must be interpreted widely, to include all alcohol, except denatured spirit unfit for human consumption. 

He further explained that if the Court holds that states have no power to levy excise unless it is specifically drinking alcohol such as whiskey, vodka and gin, it will have a grave effect on state finances. He argued that especially after GST, state’s taxing powers are significantly limited.

If a “legal territory” had to be drawn between states and the Union, Datar said, the point of demarcation was at the stage of “removal” of rectified spirits from the place of manufacturing. If the removal is for industrial purposes, then regulation and taxing powers should lie with the Union under Entry 52 of List. This has been exercised by the Industries Act. However, if the removal is to further manufacture potable liquor, regulation and taxing powers should fall with the states under Entry 8 of List II. 

Gupta: “Where does the states’ power end and the Union’s begin?”

Appearing for the State of West Bengal, Gupta argued that power to regulate industries is given to states under various entries of the State List. Entry 24 deals with industries broadly, Entry 26 concerns the “trade and commerce within the State,” and Entry 27 deals with the “production, supply and distribution of goods.” However, Entries 26 and 27 are “subject to Entry 33” of the Concurrent List. Entry 33 of the Concurrent List vests shared powers to Union and state governments over “Trade and commerce in, and the production, supply and distribution” of a variety of industries.

Gupta explained that because of this structure, even if Entry 52 of the Union List controlled manufacturing processes of such industries, control over the other two aspects of industries still vested with both state and Union governments under the Concurrent List. 

However, Section 18G of the Industries Act gives the Union the power to regulate the supply, distribution, trade and commerce—all activities already mentioned in the State List. Gupta clarified that Section 18G only applies to an industry that is scheduled under Section 2 of the Industries Act. The powers of the Union under Section 18G therefore, must be exercised in harmony with states, as the activities it governs are also under the purview of the Concurrent List. 

“If the Constitution has made the operation of Entry 26 and 27 in List II subject to entry 33 in List III, the Parliament cannot, by a law, alter that distribution of legislative power and declare that the entire matter be governed under Union list,” Gupta wrote in his written submissions. 

Giri: Denatured spirit is a product, cannot come under the scope of Entry 8, List II

Appearing for Kerala, Giri’s arguments departed slightly from the other states. He argued that “denatured spirits” should not be considered under Entry 8, as it “ does not become raw material for any other product.” States, he said, should govern “all aspects of potable alcohol including levy of duty of excise or any other levy on potable alcohol.” and that denatured spirits did not fall into that category. 

He echoed Datar’s argument that the “legal territory” between the Union and states’ powers must be the point of “removal” from the manufacturing premises. If the removal is for industrial purposes, the denatured spirit is used as a product, and hence falls under the Union’s powers. 

He explained that “this principle, on all fours, is applicable to the case of special spirits imported to the State of Kerala for manufacture of IMFL” or “Indian Made Foreign Liquor.” This means that “industries engaged in the manufacture of alcohol meant for potable purposes shall be under the total and exclusive control of States in all respects.”

Justice B.V. Nagarathna and CJI Chandrachud clarified that denatured spirit can still come under states’ purview as it falls into the category of a “product” under Entry 26 of the State List, subject to Entry 33 of the Concurrent List. 

Justice A.S. Oka ended a long day of arguments with a moment of lightness, and asked Giri: “you have been sitting here since yesterday. Arguments of Mr. Dwivedi did not have an intoxicating effect on you?” Justice Hrishikesh Roy joined in, and quipped “Mr. Giri, you are suggesting that Entry 8 gets kicked in, only when the liquid has the potential to give a kick.”

Hearings will continue on 4 April 2024.

(This report was updated at 1:48 pm on 4 April 2024)