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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 22ND DAY OF AUGUST, 2017 BEFORE THE HON’BLE Dr.JUSTICE VINEET KOTHARI WRIT PETITION No.30590/2014 (EXCISE) C/W WRIT PETITION No.56657/2014 (EXCISE)
IN W.P. No.30590/2014 BETWEEN
M/S. SHANKAR WINES A PARTNERSHIP FIRM CL-2 LICENCEE NO.17, BANNERGHATTA ROAD WILSON GARDEN BANGALORE – 560 023 REPRESENTED BY RAMAKRISHNAIAH S/O THIMMAIAH AGED ABOUT 32 YEARS
...PETITIONER (BY SRI. MOHAN BHAT, ADVOCATE)
AND
THE COMMISSIONER OF EXCISE
IN KARNATAKA
2ND FLOOR, BMTC SATELLITE
BUILDING, SHANTHINAGAR
BANGALORE – 560 027
THE DEPUTY COMMISSIONER
BANGALORE URBAN DISTRICT
KANDAYA BHAVAN
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K.G.ROAD
BANGALORE – 560 001
...RESPONDENTS (BY SRI.A.M.SURESH REDDY, AGA)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH THE IMPUGNED ORDER DATED 07.04.2014, PASSED BY THE KARNATAKA APPELLATE TRIBUNAL IN APPEAL NO.87/14, VIDE ANNEXURE–E & CONSEQUENTLY QUASH THE ORDER DATED 28.10.2013, PASSED BY THE R1, VIDE ANNEXURE – D & THE ORDER BY WAY OF FINAL NOTICE DATED 07.05.2012, PASSED BY THE R2, HEREIN VIDE ANNEXURE – C AND ETC.,
IN W.P. No.56657/2014 BETWEEN
M/S. BLUE PEACOCK VENTURES #60, INDUSTRIAL LAYOUT 5TH BLOCK, KORAMANGALA BANGALORE – 560 095 REPRESENTED BY ITS PARTNER SHRI.AMIT D PANJABI
...PETITIONER (BY SRI. B.N.SHETTY, ADVOCATE)
AND
THE COMMISSIONER OF EXCISE
VOKKALIGARA BHAVANA HUDSON CIRCLE BANGALORE – 560 027
DEPUTY COMMISSIONER
OF SOUTH BANGALORE URBAN DISTRICT (SOUTH)
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BANGALORE – 560 027
...RESPONDENTS (BY SRI.A.M.SURESH REDDY, AGA)
THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND 227 OF THE CONSTITUTION OF INDIA PRAYING TO SET ASIDE THE IMPUGNED ORDER DATED 28.10.2013 ISSUED BY THE R-1 VIDE ANNEXURE – A, IS ILLEGAL AND UNENFORCEABLE IN LAW AND ETC.,
THESE PETITIONS COMING ON FOR ORDERS, THIS DAY, THE COURT DELIVERED THE FOLLOWING:
JUDGMENT
Mr.Mohan Bhat, Adv. for Petitioner in WP No.30590/2014. Mr.B.N.Shetty, Adv. for Petitioner in WP No.56657/2014.
Mr. A.M.Suresh Reddy, AGA., for Respondents.
The controversy involved in these two petitions is about levy of Transfer Fee under Rule 17-B of the Karnataka Excise (General Condition of Licence) Rules 1967 (for short ‘Rules, 1967’) on the change in the constitution of partnership firm, which holds the Excise Licence in question. Such change in the constitution of partnership firm may take place on account of either induction of a new partner or on retirement of one or more of the existing partners.
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The fact situation in different cases may be different, reflecting the manner in which such change in constitution of partnership firm takes place, but it appears that, Rule 17-B itself does not provide any yardstick or parameters as to when such change in the constitution of partnership firm shall attract the levy of transfer fee, for transfer of excise licence in favour of the partnership firm upon such change in the constitution of the firm.
Whether such transfer fee would be levied even if a new partner is inducted only with 25% of the share in the profits and losses of the partnership firm or a retiring partner or an outgoing partner who had 75% of share in the profits and losses of the firm and a new partner inducted in his place would attract this transfer fee or not is the question. Since different Deputy Commissioners of Excise may take different view of the matter, in such cases the present petitions were heard finally by this Court at this stage with reference to the previous decision in the
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matter under Rule 17-B of the aforesaid Rules, 1967, by a co-ordinate Bench of this Court.
It may be pointed out here that Rule 17 of the aforesaid Rules 1967 does not permit the transfer of Excise Licence, except with the previous permission of the Deputy Commissioner. Rule 17-A provides for transfer of Excise Licence in the name of legal heirs, upon the death of the Licencee and Rule 17-B provides for transfer of Licence in other cases. All the three Rules in question are quoted below for ready reference; “17. Transfer of lease not permitted:- The right of retail vend of liquor shall not be transferred by the licensee except with the previous permission of the Deputy Commissioner.
17-A. Transfer in the event of death:- In the event of death of the licensee or the lessee, the Deputy Commissioner may on an application by the legal heirs of the deceased with the previous sanction of the Excise Commissioner, transfer the licence or the lese as the case may be, in their favour.
17-B. Transfer of licence in other cases:- (1) Notwithstanding anything contained in Rule 2, licences issued:-
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(i) for Sale of Indian Liquor (other than arrack) or Foreign Liquor or both, in Form No.CL-1 (Wholesale licence) or CL-2 (retail shop licences)[(CL-6A (Star Hotel Licence)] or CL-7 (Hotel and Boarding House Licences [or CL-7D (Hotel and Boarding House Licences owed by the person belonging to Scheduled Castes or Scheduled Tribes)] or CL-9 (Refreshment room (Bar) Licence under the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968; or
(ii) for sale of Beer under the Karnataka Excise (Lease Of Right of Retail Vend of Beer) Rules, 1976;
The Deputy Commissioner may on an application by the licensee and [subject to payment of transfer fee equivalent to twice the annual licence fee] specified in Rule 8 of the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or Rule 5 of the Karnataka Excise (Lease of Right of Retail Vend of Beer, Rules, 1976, as the case may be, and with the prior approval of the Excise Commissioner, transfer such licence in favour of any person named by such licence, if such person is eligible for grant of a licence under the Karnataka Excise Act, 1965 or the rules made thereunder:
[Provided that in case of a Licence granted in Form CL-7D (Hotel and Boarding House Licences) to a person belonging to the Scheduled Castes shall be transferred only to
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a person belonging to the Scheduled Castes and the Licence granted in Form CL-7D to a person belonging to the Scheduled Tribes shall be transferred only to a person belonging to the Scheduled Tribes, as the case may be. In the case of Partnership Firm, all the partners shall belong to the Scheduled Castes or the Scheduled Tribes, as the case may be. In the case of a Company incorporated under the Companies Act, 2013 all the Directors shall belong to the Scheduled Castes or the Scheduled Tribes as the case may be]
(2) Nothing in this rule shall apply to transfer of licence under Rule 17-A.
This Court is presently concerned only with the interpretation of Rule 17-B namely ie., “Transfer of Licence in other cases”. From the reading of Rule 17-B, it can be noted that such transfer fee can be levied by the Deputy Commissioner on an application made by the Licencee and subject to payment of transfer fee equivalent to twice of the annual Licence fee as specified in Rule 8 of the Karnataka Excise (Sale of Indian and Foreign Liquors) Rules, 1968 or Rule 5 of the Karnataka Excise (Lease of Right of Retail Vend of Beer) Rules, 1976, as the case may be and upon such payment of transfer fee, the Deputy Commissioner
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may transfer the Licence in favour of any person named by the Licencee, provided such person is otherwise eligible for transfer of Licence under the provisions of the Karnataka Excise Act, 1965 or Rules made thereunder.
For the purposes of this Rule 17-B, the partnership firm even though it is not a separate juristic person like a limited company incorporated under the Companies Act, 1956 or new Companies Act, 2013, but the same is treated as a “person” for the purpose of Rule 17-B of Rules, 1967.
A perusal of the Proviso to Rule 17-B quoted above would indicate that the case of the partnership firm specifically dealt with in the said Proviso and in cases of Licence in the Form CL-7D (Hotel and Boarding House Licences) held by a person belonging to Scheduled Castes or the Scheduled Tribes category, the said Proviso stipulate that in the cases of partnership firm, all the partners shall belong to the Scheduled Castes or the Scheduled Tribes or in case of company registered under
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the Companies Act, 2013, all the Directors shall belong to Scheduled Castes or the Scheduled Tribes category.
However, the learned Counsels at the Bar had brought to the notice of the Court that this Court has already struck down the Special category of CL-7D Licences for the aforesaid categories of Hotels and Boarding House Licences to be given only to the reserved class of Scheduled Caste or the Scheduled Tribe persons in the case of B.Govindaraj Hegde Vs. State of Karnataka in W.P.No.19788/2015 disposed of on 22.07.2016 and that judgment has been upheld by a Division Bench of this Court in W.A.No.3374/2016 c/w W.A.Nos.3368/2016, 3211/2016, 4048/2016 and 4402/2016 disposed of on 20.01.2017 and by the Supreme Court in SLP(C) Nos.021377-021381/2017 disposed of on 11.08.2017.
There is no dispute from either side that the partnership firm as such can be treated as a ‘person’ for the purpose of Rule 17-B of Rules, 1967 and the change in the constitution of partnership firm would attract the
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provisions of Rule 17-B and the payment of transfer fee. But the question still remains as to what is the yardstick or line drawn for the purpose of treating a transfer by way of change of composition or constitution of the partnership firm and at what stage it would attract such payment of transfer fee.
The learned Counsels at the Bar have brought to the notice of the Court that similar controversy came to be decided by a Co-ordinate Bench of this Court in S.A.Suresh Vs. Deputy Commissioner in W.P.No.17393/2012 along with the batch of other petitions disposed of on 19.07.2012 in which the learned Single Judge of this Court dealt with the aspect relating to the change in the constitution of the partnership firm attracting Rule 17-B of the aforesaid Rules, 1967 in the following manner; “6. This rule has been introduced on 23.05.1995 and is deemed to have come into force on 01.04.1995. The position as obtained prior to this rule was that the licence to vend liquor was not transferable. In fact, this position has been made clear in the
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decision of the Division Bench in the case of T.THIMMAPPA AND OTHERS VS THE EXCISE COMMISSIONER IN KARNATAKA, BANGALORE AND OTHERS – 1992(1) KAR.L.J. 360. In the said case, the Division Bench has held that licence is purely personal. It cannot be transferred at all and that is why Rule 17-A of the Rules clearly laid down that only in the event of the death of a licensee, the Deputy Commissioner may on an application by the LRs of the deceased with the previous sanction of the Excise Commissioner can transfer licence in favour of the LRs. This Court, therefore, found exception to the instructions issued by the Excise Commissioner on 02.05.1984 providing for transfer of licence, otherwise than in favour of the LRs, observing that such circular was contrary to the rules. The Division Bench has further repelled the contention that question of equitable estoppel did not arise as such transfer was not permitted in law.
It is thus clear that the provision enabling transfer of licence except in favour of the LRs of deceased licensee was for the first time introduced by inserting Rule 17-B. Rule 17-B as extracted above provides that the Deputy Commissioner may on an application by the licensee and subject to payment of transfer fee equivalent to the annual licence fee and with the prior approval of the Excise Commissioner, transfer such licence in favour of any person named by such licencee, provided such person is eligible for grant of a licence under the Karnataka Excise Act, 1965 and the Rules made thereunder. Thus, for the first time by imposing several safeguards, conditions and restrictions, provision has
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been made for transfer of licence in cases other than the one covered under Section 17- A. Therefore, there cannot be any dispute about the legal position that without complying with the requirement of Rule 17-B, there can be no transfer of licence to vend liquor.
In the instant case, the licence was given in favour of a firm by name M/s. Ranganatha Wines. It had two partners. Those partners inducted two others by re- constituting the firm and after inducting two other partners, the original partners retired.
The contention of Sri G.K.Bhat, Counsel for the petitioners is, in all cases where there is any change in the partners of the firm, the licensee has been called upon to pay the transfer fee treating the same as transfer of licence which is totally illegal. The issue therefore, is whether all changes in the composition of the firm tantamounts to a new firm coming into existence and thereby resulting in implied transfer of licence from one held by the firm and its partners in favour of the re-constituted firm and the partners who have joined the firm subsequently. In this background, I have heard the learned Counsel for the parties. Sri Bhat has strenuously contended that the firm is different from its partners. Therefore, mere change in the composition of the firm does not amount to transfer of license.
Learned Advocate General, at the outset, submits that against the impugned order passed by the Deputy Commissioner of
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Excise, an appeal is provided to the Commissioner of Excise under Section 61(2) of the Excise Act, and therefore, petitioners who have an alternative efficacious remedy cannot rush to this Court invoking the writ jurisdiction. Reliance is placed in this regard on the judgment in the case of UNITED BANK OF INDIA VS SATYAWATI TONDON AND OTHERS – (2010) 8 SCC 110.
He has further pointed out that the partnership firm though registered is not a separate legal entity and that the partners constitute a compendium of members who have joined together to pursue their business and it is for this reason that the licence granted is not exclusively to a legal entity, but in favour of the partners though it is given in the name of the firm. He refers to Section 17-A, 13, 14 and 42 of the Indian Partnership Act and Order 30 of CPC. Reliance is placed on the judgments of the Apex Court in the case of DULICHAND LAXMINARAYAN VS COMMR. OF INCOME-TAX, NAGPUR – AIR 1956 SC 354, to emphasize the nature of the legal character of a partnership firm, particularly on paragraph 15. Judgment of the Full Bench of the Punjab & Haryana High Court in the case of M/S. NANDLAL SOHANLAL JULLUNDUR VS THE COMMISSIONER OF INCOME-TAX, PATIALA – AIR 1977 PUNJAB AND HARYANA 320 is also relied upon in this regard.
Attention of the Court is also invited to the judgment of this Court in the case of GEETHA VS STATE OF KARNATAKA AND OTHERS – 2000(2) KAR.L.J. 383, to contend that State has exclusive privilege and right of manufacturing and selling intoxicating liquor
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and grant of CL-9 licence is a privilege or permission granted by the State to the licencee to sell liquor in the manner prescribed in the licence. Therefore, parting with the possession and control of the business covered by CL-9 licence would amount to transfer of such privilege and such an act without the permission of the licensing authority will be illegal and violative of the terms of the licence.
In the said judgment, at paragraph 10, it is note worthy to notice that this Court has stated that if the licensee retains possession and control, but only authorises a servant or an Agent to manage the business on his behalf, there is no illegality or infringement of the conditions of licence. In paragraph 11, it is further observed in the said judgment that, a transfer of licence may be either by way of a transfer simpliciter (that is transfer of the licence alone) or a transfer implied in, or consequential upon: (a) the transfer of the business of Bar and Restaurant covered by the CL-9 licence, by way of sale or mortgage with possession; or (b) the licensee parting with the possession and control of the business, by way of lease, sub-lease or an agreement of transfer and/or a power of attorney coupled with interest. Useful reference can also be made to the observations made in paragraph 15 of the said judgment, wherein it is held that having regard to the nature of the licence and the obligations attached to a licence, under the Excise Act and Rules, it would be open to the licensing authority to consider at the time of granting licence as to whether the application
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is merely a camouflage for someone else running the business as there was no fundamental right to carry on trade or business in liquor and the State had the power to effectively regulate the various activities relating to intoxicants as observed by the Supreme Court in the case of HAR SHANKAR VS DEPUTY EXCISE AND TAXATION COMMISSIONER- AIR 1975 SC 1121.
In the light of the respective contentions urged, if the materials on record are perused, it emerges that the action initiated in demanding transfer fee is traceable to the letter dated 20.08.2009 issued by the State Government (Principal Secretary, Finance Department, Bangalore, addressed to the Excise Commissioner). In the said letter, the judgment rendered by this Court in W.P.No.8130/2002 dated 28.10.2006 is referred to state that in the event of induction of new partner or change in the partnership by re-constituting the same, transfer fee is liable to be collected. Thereafter, the Excise Commissioner has addressed letters to all the Deputy Commissioners of Excise in the State on 04.10.2011 to initiate action by securing necessary information about the change in the constitution and composition of the partnership firms and for collection of licence fee in terms of Rule 17-B of the Rules by ensuring that applications are submitted by such firms. This communication is produced at Annexure-K to the writ petition.
Thereafter notices came to be issued to the petitioners calling upon them to make payment of the transfer fee as provided under
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Rule 17-B. These notices dated 28.02.2012 and 28.03.2012 are produced at Annexures-E & G, respectively. Petitioner has submitted a reply on 31.03.1012 vide Annexure-F. In the reply, it is submitted that the previous partnership firm which had been granted licence has continued in existence although new partners have been inducted and earlier partners have resigned and therefore, the judgment rendered by this Court in W.P.No.8130/2002 had no application to the facts.
The Deputy Commissioner of Excise, Hassan, has having considered the reply submitted, come to the conclusion that the reply could not be accepted as, in terms of the Government directive and in the light of Rule 17-B, petitioner was required to make payment of transfer fee.
During the course of arguments, learned Advocate General has pointed out that Annexure-M communication issued by the Finance Department addressed to the Excise Commissioner has to be ignored as it is not traceable to any authority vested with the Finance Department to issue such communication/direction. He further submits that whether a change in the partnership firm, by inducting new partner tantamounts to transfer of licence from the previous firm and the partners to the re-constituted firm is a matter which the competent authority has to consider based on the facts and circumstances of the case and therefore, in the present case, as the Deputy Commissioner of Excise has found that there is re-constitution of the firm resulting in
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implied transfer of licence in favour of newly inducted partners, transfer fee has to be paid, he, therefore, submits that the petitioner has to approach the Appellate Authority, if at all they are aggrieved by the order passed by the Deputy Commissioner of Excise. He further points out that if such an appeal is filed, the Appellate Authority will examine the mater in accordance with law based on the facts and circumstances of the case and law applicable. He, however, asserts that in the instant case, there is indeed transfer of licence from the previous partners in favour of the newly inducted partners and therefore the action of the Deputy Commissioner of Excise is just and legal.
In the light of the above submission, it has to be stated that the communication issued by the State Government through the Finance Department on 20.08.2009 vide Annexure-M cannot have any legal effect and the authorities of the Excise Department who are invested with quasi-judicial powers to examine the issue regarding the liability of the partnership firm to pay transfer fee on account of the alleged change in the composition of the firm have to consider the question without reference to and without in any manner being influenced by the said communication dated 20.08.2009 and by ignoring the same.
As regards the effect of change in the composition of the partnership, there can be different ways of bringing about such change. The change in the composition may be such that some partners may be inducted along with the new partners; some
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of the partners may retire out of the existing partners. In both the cases, there is likelihood of change in the control and management of the firm and in some cases, it may not result in material change at all in the management of the firm. A partnership firm does not have a separate legal entity as compared to the legal status that a corporate body enjoys. In DULICHAND LAXMINARAYAN VS COMMR. OF INCOME-TAX, NAGPUR – AIR 1956 SC 354, the Apex Court dealing with the nature and legal character of a partnership firm, has held that the general concept of partnership, firmly established in both systems of law (English and Indian), still is that a firm is not an entity or person in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.
If this broad legal aspect is kept in mind and the object and purpose behind insertion of Rule 17-B is examined, coupled with the requirements that are to be satisfied while making an application for grant of licence by a firm, it will be clear that the State having exclusive privilege and right of manufacturing and selling intoxicating liquor, can grant licence as a privilege or permission granted by the State to the licencee to sell liquor in the manner prescribed in the licence. If that is so, parting with possession and control of business covered under such a licence would certainly amount to transfer of
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such privilege. Such an act, if resorted to without the permission of the licensing authority, will be illegal and violative of the terms of licence. Such a situation can be brought about by what may be called as transfer simplicitor or by an act that by implication may tantamount to transfer of such licence.
If a licence is issued in the name of a firm consisting of specified persons as its partners on the basis of the details furnished at the time when the application is filed and if such firm, later on, undergoes change in its constitution/composition or control or management, then it may result in the licence being impliedly transferred in favour of the re-constituted partnership firm. Merely because some of the old partners have continued in the re- constituted firm, may not be a defence to avoid the rigour of Rule 17-B. It all depends on the facts and circumstances of each case. If a partner is newly inducted and he has no real role in the management and control of the existing firm in whose favour the licence is granted, and where such induction does not in any manner bring about major change in the shares held by the partners, then a defence will be open to the firm to say that there is no implied transfer. But, where in a given case induction of new partners has resulted in implied transfer of the management and control in favour of new partners as well, then the rigour of Rule 17-B cannot be avoided.
Rule 17-B is required to be strictly construed. It has to be given its full effect. It
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has to be borne in mind that the licencee has no right to transfer the licence. He cannot achieve this object by camouflaging his actions by resorting to re-constitution of the firm. Whether the action is a camouflage really intended to transfer the licence is a matter that depends on the facts and circumstances of each case and the competent authority has to examine the same.
In the case of Surendra Shetty Vs State of Karnataka, W.P.No.8130/2002 disposed of on 28.10.2006, this Court confirmed the orders passed by the competent authority as affirmed by the Karnataka Appellate Tribunal, wherein it was held that in the name of re-constitution of the firm, the management had been taken over by the petitioner and the original partner had been reduced to insignificant status, tantamounting to change of management. In such circumstances, this Court refused to interfere with the concurrent findings of fact recorded by the authorities holding that there was implied transfer of license as a result of the reconstitution of the firm. Therefore, the issue has to be determined based on the facts and circumstances of each case and not by applying a thumb rule.
In the light of the conclusion that I have reached, it is now not appropriate for this Court to embark upon an enquiry into the nature of the re-constitution and composition and the change of control and management if any of the petitioner firms after re-constitution. The same has to be decided by the competent
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authority, who, in the instant case, is the Deputy Commissioner of Excise.
However, as the Deputy Commissioner, in the present case, has proceeded on the basis of the Government Order and the clarification issued by the Excise Commissioner based on the Government Order, the authorities have to ignore the said Government Order and examine the matter keeping in mind the principles laid down herein above.
The Deputy Commissioner of Excise has passed the impugned orders referring to the facts and circumstances of each case, it is not necessary for this Court to undertake re-examination of the facts involved in these cases as the petitioners have an alternative efficacious remedy of preferring a statutory appeal before the Commissioner of Excise under Section 61(2) of the Act. Petitioners are therefore given 30 days time from the date of receipt of a copy of this order to prefer such an appeal before the Commissioner of Excise, whereupon the Commissioner will examine the matter, keeping in mind the observations made and the principles laid down in this order.”
After having discussed the legal position in detail, since the matter was remanded back to the Deputy Commissioner of Excise in view of the alternative remedy
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available to the petitioners under Section 61(2) of the Excise Act, in the absence of any specific guidelines laid down by this Court then, it is felt expedient now that the discretion to be exercised by the Deputy Commissioner in this respect may differ from one officer to another and this may cause unnecessary litigation on account of different views. Therefore, it is considered expedient and proper by this Court to lay down the guidelines with regard to the same. The learned counsels on both the sides also agreed for the same.
It is to be seen first that when such a change in the constitution of partnership firm would effectively result in change in the control and management of the partnership firm, who is the Excise Licencee in question. If an outright sale of business takes place and entire new set of partners takes over the business, then there is no difficulty in applying Rule 17-B to such a case and for transfer of Excise Licence in the name of the new partnership firm, even though, it has continued to carry on the business in
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old and existing name and style of the partnership firm. But, the difficulty may arise where the change in the constitution of partnership firm takes place in a phased or staggered manner. Therefore, a thumb rule of 50% or more of the change of the share in the profits and losses of the partnership firm is considered to be appropriate and the said thumb rule of 50% change in the existing partnership firm composition was found to be acceptable to both the sides, the petitioners as well as the Excise Department, also.
The said rule of 50% or more of change in composition would operate in the following in the manner:- Suppose, the Excise Licencee is in the partnership firm ie., M/s. ABCD, Bangalore with four partners namely A, B, C, D each having 25% of shares in the partnership firm and the Excise Licence is held during the current year July 2017 to June 2018. On 31.12.2017, partner with 25% share retires and a new partner ‘X” is introduced in the partnership firm giving ‘X’ 25% of share. Since in the
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said illustrative case, the partnership firm of M/s.ABCD does not lose 50% or more of its effective control and ‘X’ is introduced in the firm with only 25% of share, this will not attract the transfer fee and the new partnership firm M/s.ABCX can be given the same Licence upon a transfer being recorded under Rule 17-B of Rules, 1967, without payment of transfer fees.
In the next change in the constitution of partnership firm, if partner “C” also retires with 25% share and a new partner say ‘Y’ is introduced and he is also given 25% share in place of “C”, the new firm M/s.ABXY will be a new firm, where the original partnership firm M/s.ABCD loses 50% of its stake in the new partnership firm M/s.ABXY. At this stage, a new firm M/s.ABXY can get Licence transferred in their name only upon paying the transfer fee in terms of Rules 17-B of Rules, 1967.
Taking another example, if two partners at the same time like A and B retire out of the firm M/s.ABCD and 50% is given to the new partners entering at the same time
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namely, X and Y with 25% share to each, even then upon such change of licence from M/s.ABCD to M/s.CDXY, it will attract the transfer fee under Rule 17-B. In terms of the aforesaid thumb rule of 50% or more of the effective control of existing Licencee partnership firm is divested and given to the newly entering partners.
If it is a case of more than 50% of share (effective control) is divested by the existing Licencee firm and such share of 50% or more of the profits of the partnership firm of the existing partners is given to the newly entering partners, there is no question of any confusion and such a change in the partnership firm will definitely attract the transfer fee under the Rule 17-B of Rules, 1967.
While considering the case of change of partners, it will not matter even if an outgoing or incoming partners are the family members. So, even if the husband and wife of the partnership firm goes away upon retirement from partnership firm and the new partner who may or may not be a family member comes in, if the 50% of the existing
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partners who hold the Licence at a particular relevant point of time is given away to other new incoming partners, then, it will be a transfer attracting the transfer fee under Rule 17-B of the Rules, 1967.
In other words, so long as the existing partners do not divest themselves to 50% or more of the stake in the partnership firm which holds the Licence in question, the transfer fee applicable under Rule 17-B of the Rules will not be attracted or will not be payable. But the moment, the change is effected by one or more of the partnership deeds subsequently executed to divest the existing partners divesting of 50% or more and such 50% or more is the stake given to the incoming partner(s), it will attract the transfer fee under Rule 17-B of Rules, 1967 irrespective of their relationship with the existing partners.
To effectively implement this yardstick of 50% or more, an obligation would be cast upon the existing Licencee firm to immediately inform to the Excise Department of any change in the constitution of
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partnership firm which may be effected in the said partnership firm whether it divests the existing partners of 50% of their stake or less or more, so that the Excise Department can keep a track of every change in the composition of the partnership firm at all the stages and can apply the aforesaid rule of 50% or more, whenever the said threshold of 50% by the existing partnership firm Licencee is crossed, the transfer fee may be imposed and collected by the Excise Department.
In case, the partnership firm who holds the licence does not inform the fact of change in the constitution of partnership firm within a reasonable period, say within a period of one month from the change in constitution of partnership firm, the concerned Excise Authorities may even proceed to initiate action against the Licencee of the partnership firm to impose suitable penalty and even take action for cancellation of the Licence itself.
Thus, with the aforesaid illustrative examples of change in the constitution of partnership firm for the
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purpose of Rule 17-B, it is held that there would be implied effective change of control and management of the said partnership firm, if 50% or more of its stake in the profit sharing ratio changes hands and existing strength of group of partners loses 50% or more of the total stake of 100%, then such a change in the constitution of partnership firm will attract the payment of Transfer Fee under Rule 17-B. Below 50%, it will not attract the payment of transfer fees. The change of 50% or more will be reckoned with reference to the existing excise licence composition of firm and transferred excise licence under Rule 17-B and at the every stage of 50% or more of change of stake by exit and entry of partners in the firm it will so attract the transfer fees and for regulating such change in the constitution of Partnership Firms; every change of the constitution will have to be informed by the licencee firm to the Excise Department and they will maintain the record of all such changes in the constitution of the partnership firms on regular basis.
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The said thumb rule of 50% or more will be attracted at each stage of crossing of such stake of 50% or more when compared with the composition of the firm in whose favour the Excise Licence exists and is sought to be transferred upon the payment of transfer fees under Rule 17B. In other words, when 50% or more of the stake of the licence partnership firm is effected, even in the cases of the transferred Licencee partnership firm a change is further effected again in such partnership firm – composition, divesting the existing partners in such Licencee firm of 50% or more of their stake jointly or severally and the new incoming partners are given such 50% or more of the stake in the partnership firm, then again it will amount to a ‘transfer’ within the meaning of Rule 17-B of Rules, 1967 and will again attract the transfer fee under the said Rule.
It is made clear that these guidelines are only for the purpose of imposition, levy and collection of ‘transfer fee’ and it has nothing to do with the compliance with the other conditions given in Rule 17-B, namely, that the transferee
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firm should be otherwise also eligible to get the Excise Licence to be transferred in the name of such firm. If there is any other disqualification and ineligibility with the transferee partnership firm, then the Deputy Commissioner will of course be free to take his own decision and pass appropriate orders depending upon the facts and circumstances of each case and it is again reiterated that this judgment only lays down the parameters and yardsticks for attracting the transfer fees under Rule 17-B of Rule of 1967. This is done to avoid different views by different authorities all over the State and to achieve a uniformity in such cases and also to avoid unnecessary litigation at different forums, may be before the Departmental Authorities or even before this Court as far as the issue of levy of transfer fee is concerned under Rule 17-B of Rules of 1967.
It is also clarified that the aforesaid Rule 17-B will also stand attracted in the cases where there are only two partners. For example, A and B, each having 50% of shares
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and one partner B retires, but no new partner is taken in and firm M/s. AB is converted into a proprietorship concern of Mr.A. This will also attract transfer fee, if the proprietorship concern of Mr.A seeks such transfer of the licence under Rule 17-B. In the same case, even though the share of Mr.A may be 70% and share of Mr.B is only 30%, but since with the B’s retirement no new partner is taken in, the change would convert a partnership firm into a proprietorship concern of Mr.A and it will still attract the transfer fee and if Mr.A wants the Licence to be transferred in the name of Mr.A as a proprietorship concern, A will have to pay the transfer fees. This additional point also requires a clarification because even if the Excise Licencee does not continue in the form of partnership firm, but such a change converts a partnership firm into a proprietorship concern or vice-versa ie., a proprietorship concern becoming a partnership firm, such cases would also attract Rule 17-B, irrespective of aforesaid rule of 50% or more of change in share or in other words effective control of the partnership firm.
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The petitions are disposed of accordingly. No costs.
Sd/- JUDGE