The latest flashpoint between the Aam Aadmi Party (AAP)-led Delhi government and the Bharatiya Janata Party (BJP)-led Central government has been the administration of the Delhi Excise Policy, which was implemented with effect from 17 November 2021. While the issue has been a political slugfest between the parties, the less talked about aspect pertains to the legal ramifications that may arise because of the uncertainty in terms of regulating the liquor trade in Delhi.
The legal and regulatory framework pertaining to liquor trade in Delhi is governed by the Delhi Excise Act, 2009 (“Delhi Excise Act”), the Delhi Excise Rules, 2010 (“Delhi Excise Rules”) and the notifications issued thereunder. In order to implement the said laws, public notices detailing the excise policy for a particular time period are issued from time-to-time apropos grant of various forms of licenses, subject to which the prescribed wholesale and retail licenses are granted. To understand the situation that has currently emerged, a brief historical background is necessary.
A need was felt to revamp the entire structure pertaining to the liquor trade, which led to the constitution of a committee in September 2020 to suggest suitable measures. The Committee was headed by then-Commissioner of Excise, assisted by the Deputy Commissioner and the Assistant Commissioner. The committee was tasked with suggesting measures pertaining to the following:
augmenting the State Excise Revenue,
simplifying the pricing mechanism,
measures for checking malpractices, and
ensuring equitable supply and distribution of liquor
The committee tabled its report on 13 October 2021, post which necessary amendments were carried out in the Delhi Excise Rules and the Delhi Excise Policy 2021-2022 (“Delhi Excise Policy”), which was implemented with effect from 17 November 2021. The main characteristics of the Delhi Excise Policy can be summarised as under:
Delhi was divided into 32 zones. Each zone was to have one zonal licensee, who would be holding a license in Form L-7Z. The zonal licensee was to be selected after the tendering process. This was an entirely new facet inasmuch as the zones were created for the first time.
Governmental presence from the retail end was completely withdrawn. Government-managed retail outlets were to be discontinued.
The zonal licensee was thereafter allowed to operate 27 retail vends in each ward falling under the respective zone.
In a bid to ensure that no cartelisation takes place, it was stipulated that a zonal licensee cannot be a wholesale distributor and vice-versa.
Further, prior to the implementation of the Delhi Excise Policy with effect from 17 November 2021, the legal framework required that a wholesaler can be a person who holds a manufacturing license as well. This position was completely reversed in the Delhi Excise Policy and a specific condition was introduced stipulating that an entity holding a manufacturing license anywhere in the country cannot bid for a wholesale or a retail license.
For the first time, it was provided that a retail licensee can give discounts, rebates and concessions on the Maximum Retail Price of the liquor that was to be sold by them.
How the Entire Mechanism Failed
From a legal standpoint, it appeared at that time that as such, there was no legal infirmity insofar as the Delhi Excise Policy is concerned. The stipulations provided were majorly in sync with the recommendations of the committee.
However, while the idea may have been to ensure equitable distribution of liquor and augment the state excise revenue, it is quite evident that the entire mechanism seems to have failed to achieve the objective. In fact, even prior to the rollback of the Delhi Excise Policy, various writ petitions had been filed before the Hon’ble Delhi High Court challenging the propriety of the Delhi Excise Policy, the amendments carried out in the Delhi Excise Rules and the public notices issued for grant of licenses. Mostly, the Delhi Excise Policy had been challenged before the Hon’ble Delhi High Court by various stakeholders on the following grounds:
The terms and conditions for inviting the bids for the grant of retail licenses were arbitrary. While the idea was to prevent cartelisation, by creating 32 zones and granting one zonal licensee for each zone, in effect, the 32 entities were controlling the retail trade.
Further, as per the Delhi Excise Policy, it was also stipulated that one zonal licensee can hold a license for two zones. Therefore, in effect, a total of 16 entities could have control of the entire liquor trade
The pricing mechanism, which has been fixed under the Delhi Excise Policy was also challenged as being flawed. Rule 54 of the Delhi Excise Rules provided that prices can be fixed with the consent of the government, whereas the Delhi Excise Policy provided that prices can be fixed by the Commissioner and the concurrence of the government was not required as such.
The aspect of providing discounts on Maximum Retail Price was also challenged and was seen as a step towards promoting the consumption of liquor.
What Was the Trigger?
The aforesaid petitions are still pending before the High Court. Given the plethora of litigations that had been instituted, it can be surmised to be one of the triggers for the Delhi government ultimately withdrawing the Delhi Excise Policy.
It is possible that while the Delhi Excise Policy led to the augmentation of the government's excise revenue, the overall implementation was not completely thought through. A glaring instance of the same can be gauged from the subsequent withdrawal of the right to give discounts on the Maximum Retail Price.
Once the policy came into effect, retailers started offering overwhelming discounts and ran various incentive policies, which led to chaos and overcrowding in the retail shops. To tackle the same, necessary orders were issued whereby the offering of discounts was prohibited. This outcome ought to have been anticipated in advance. In the absence of any guiding mechanism or limit on the offering of discounts, there was no check possible, which ultimately led to its withdrawal.
It may also be noted that the strategy adopted this time, ie, the withdrawal of an existing policy, has not been deployed for the first time. Post the first wave of COVID-19, as the economy was gradually opening up, a levy in the nature of Special Corona Cess was levied on liquor. However, the levy and the mode of implementing the same suffered from various legal infirmities and was a subject matter of challenge before the Hon’ble Delhi High Court. Owing to the legal issues surrounding the levy, the same was withdrawn within two months post the filing of the writ petitions.
But Will the Rollback End All Woes?
The question that requires deliberation is whether the rollback of the Delhi Excise Policy will be an end to the issues that were being faced or whether it will lead to further legal challenges.
At the outset, it may be noted that reverting to the old Excise Policy with effect from 1 September 2022 will have a lot of operational challenges. Delhi is already experiencing a liquor crisis, which has forced consumers to procure liquor from neighbouring areas.
Reverting to the earlier regime may first entail reopening government-owned retail outlets. In the earlier regime, approximately 60% of the retail vends were operated by government-owned outlets and it has to be seen whether all the vends can start functioning at one go with a sufficient supply of liquor.
Separately, the scrapping of the Delhi Excise Policy itself may not be entirely free from legal challenges. The licensees who ultimately got the license had to pay a substantial amount as a license fee and incurred huge costs in upgrading their premises. With an abrupt end to their business operations, applications are likely to be filed seeking a refund of the license fee paid.
Practically, it is a fact that the adjudicating of refund applications under the State Excise law of Delhi at the Commissionerate level is a highly time-consuming process and most of the time, it leads to the filing of petitions before the High Court. Hence, it may lead to a fresh stream of litigation on this aspect, notwithstanding the fact that litigations challenging the propriety of the Delhi Excise Policy are already pending. The fate of the pending litigations also has to be seen.
Licensees Have Incurred Huge Expenditure
Further, given the huge costs that have been incurred in setting up the retail vends, it may not be a surprise if petitions are filed challenging the withdrawal of the Delhi Excise policy on the ground of ‘doctrine of legitimate expectation’ or ‘promissory estoppel’. While this principle is mostly applicable in cases of withdrawal of tax exemptions, given the way the entire issue has played out, petitions filed on this ground may also be a possibility, more so since the licensees have incurred huge expenditures in the hope that the overall sale of liquor in Delhi would be on the rise, which would increase their revenue as well.
Therefore, the scrapping of the Delhi Excise Policy may be the beginning of a new set of legal disputes.
Fundamentally, what ought to have been done is to plug the loopholes by identifying the problem areas instead of scrapping an entire policy that has been in place for close to nine months.
Reverting to the old regime will have its own share of operational and legal challenges. From a legal perspective, the issue seems to be far from over, and that is without even going into the issue of allegations of corruption.
(The authors are with Khaitan & Co. Sudipta Bhattacharjee is Partner, Harsh Makhija is Principal Associate, and Arjyadeep Roy is Senior Associate in the Indirect Taxes & Customs practice. This is an opinion article and the views expressed are the authors own. The Quint neither endorses nor is responsible for them.)