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TMI Blog2021 (9) TMI 1561X X X X Extracts X X X X X X X X Extracts X X X X ..... uld certainly have the advantage of controlled supply of water - the absence of a specific clause, akin to Clause 14 of CUMI Agreement, in INDSIL Agreement, would be of no consequence. The relationship between the parties would be governed by Clause 14 of the Policy, as incorporated in the respective Agreements. Whether Clause 14 of CUMI Agreement and Clause 14 of the Policy which stood incorporated into the respective Agreements could be termed to be unconscionable and/or manifestly arbitrary? - HELD THAT:- I cases where a term of contract or agreement entered into between the parties is completely one sided, unfair and unreasonable, where the other party having less bargaining power had to accept such term by force of circumstances, the relief in terms of the decision of this Court in Central Inland Water Transport Corporation [ 1986 (4) TMI 271 - SUPREME COURT] can be extended. It may be stated that the Agreements were entered into after long deliberations where both CUMI and INDSIL had the advantage of legal counsel - It cannot be said that CUMI and INDSIL were in a position with lesser bargaining power or were so vulnerable that by force of circumstances they were forced to ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nand Sukumar, Bhupesh Kumar Pathak, S. Sukumaran, Advs., Meera Mathur, AOR, V. Giri, Sr. Adv., Amit Krishnan, Adv. and R. Gopalakrishnan, AOR For the Respondent : C.K. Sasi, AOR, Jaideep Gupta, Sr. Adv., P.V. Dinesh, AOR, Rashmi Singh, Ashwini Kumar Singh and Bineesh K., Advs. JUDGMENT U.U. LALIT, J. 1. Civil Appeal Nos. 9845-9846 of 2016 preferred by M/s. Indsil Hydro Power and Manganese Limited (hereinafter referred to as INDSIL ) and Civil Appeal Nos. 9847-9850 of 2016 preferred by Carborundum Universal Limited (hereinafter referred to as CUMI ) are directed against the common judgment and order dated 03.04.2014 passed by the Division Bench of the High Court The High Court of Kerala at Ernakulam . allowing Writ Appeal Nos. 1345 and 1355 of 2013 preferred by State of Kerala against INDSIL and CUMI respectively. 2. On 07.12.1990, the Government The Government of Kerala framed a policy vide G.O. (MS) No. 23/90/PD (the Policy, for short) allowing private agencies and public undertakings to set up hydel schemes for generation of electricity at their own cost. As per the Policy, the matters concerning the construction, operation and maintenance of the hydel scheme were to be managed a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Board on 18.05.1991 (CUMI Agreement for short), which specifically referred to the Policy and stated that the terms and conditions of the Policy shall form part of this agreement as if incorporated herein . Clauses 8 and 14 of CUMI Agreement were as under: 8. The energy from Maniyar Hydro Electric Project fed into the K.S.E.B. Grid will be metered at a location as detailed above (using meter duly calibrated by K.S.E.B.) and this quantum of energy less twelve percent towards wheeling charges and T D Lesses will be delivered free of cost to CUMI at their E.B.T. Terminate at the point of supply in their installations. In the case of supply or receipt made in LT Lines the allowance for lessee and wheeling charges will be more and will be as stipulated by the KSEB. In case energy in excess of the requirement of CUMI is generated from the projects during one accounting year such excess energy shall be fed into the KSEB grid itself at rates to mutually agreed upon. Under no circumstances shall CUMI be entitled for the sale or transfer of any excess energy or any energy produced from the project to any party other than the KSEB. The accounting of the energy fed into the grid and suppl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... AND PHASE II project fed into the KSEB grid will be metered, at a location as detailed above (using meter duly calibrated by KSEB) and this quantum of energy less 12% (Twelve percent) towards wheeling charges and T D losses will be delivered free of cost to the company and their associate M/s. Sun Metals Alloys Pvt. Ltd., Kanjikode, Palaghat at the EHT Terminals at the point of supply in their installations if any, or it will be banked by the KSEB if the company so desires. The KSEB will collect 1% (One percent) of the energy so banked as its commission. This will be in addition to wheeling and loss towards transmission and distribution charges. ... ... ... 19. Cess/ Royalties for use of water, if decided by the Government together with tax/ duties as fixed by the Government from time to time shall be paid by the company to Government. 8. Since the setting up of the project by June, 2001 at a cost of Rs. 50 crores, INDSIL has been generating electricity which is essentially used by it and its associates as stated in Clause 10 of INDSIL Agreement. 9. The respective projects were thus set up by CUMI and INDSIL for Captive Power Consumption and such producers of electricity for own co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reflect on tariff and hence not investor friendly. 12. Both CUMI and INDSIL have been paying wheeling charges for consumption of electricity. Right from 1994 till April 2003, CUMI had also paid charges for the use of controlled supply of water at the rate specified in Clause 14 of the CUMI Agreement. In May 2003, CUMI however made a representation that it be exempted, like other projects from payment of such charges. Attempts on part of the Board to charge royalty/cost component for controlled release of water from CUMI and INDSIL in terms of Clause 14 of the Policy has led to the disputes in the instant matters which are subject matter of these appeals. Before we set out the pleadings pertaining to such disputes, the locations of the respective Projects and what kind of flow of water is used, must be noted: CUMI: The water flowing down from Moozhiyar Power House of the Board is diverted to the Kakkad Power House (50 MW) of the Board for generation of electricity using tail race benefit of Moozhiyar Power House. After power generation at the Kakkad Power House, the water is allowed to flow back into the river and is then utilized for irrigation and for the Maniyar Hydro Electric Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from Moozhiyar Power House supplemented by water from the catchman area of river banks below the Moozhiyar Power Station was partly utilized for irrigation purpose and the remaining water flows down earlier, it was only part of such water from Moozhiyar Power Station and from catchman areas that is utilized for generation of electricity by the Petitioner at its Maniyar Hydel Project. However, from the year 1998 the water flowing down from Moozhiyar Power House was diverted to the Kakkad Power House of the 2nd Respondent and after generation of electricity at Kakkad Power House the water flowing down flows back to the same river at a lower stage and utilized for irrigation and partly for the Petitioner's Maniyar Project. It is submitted that the water released from Moozhiyar Power House is thus diverted to Kakkad Power House and utilized for power generation there. The alleged controlled release of water from Moozhiyar Power House to the Petitioner's hydel project at Maniyar is no longer there and has ceased to be available to the Petitioner after commissioning of the Kakkad Power Station by the 2nd Respondent. It is therefore submitted that the 2nd Respondent cannot in any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting up the plant the Petitioner cannot now turn around and say that the conditions were thrust upon him. 3. .... The KSE Board had to construct and maintain dams and reservoir for collection of water by investing crores of rupees. The water stored in the dam is released periodically and controlled release of water is effected by the Board to the Petitioner licensee. So the Petitioner is getting sufficient water for generating power regularly as per their requirement without any capital investment for storage of water. ........ It is further stated that normally generation of power from schemes of the category small/mini/micro utilizing the storage benefit of the existing reservoir and tailrace benefit of existing power stations will not be entrusted with private agencies. But Government under special circumstances allowed such schemes to be set up by private parties. In such case, in order to account for the additional advantage gained by the agency by way of getting the controlled release, the agency will have to pay to government or the Board, as the case may be, in tariff equivalent to the cost component for energy generated from the scheme. This will be in addition to the roya ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his project is being charged at the rate of 10% of the energy tariff rate for EHT Consumers and is paid to KSEB. Government after detailed examination hereby order that the royalty and cost of controlled release of water to the Kuthungal HEP shall be reckoned on the quantum of energy generated and shall be 10% of the energy tariff rate for EHT Consumers current from time to time for every unit of energy generated and in addition, the Company is liable to pay 1.2 paise per unit as electricity duty for each unit of electricity generated in accordance with the provision of the Kerala Electricity Duty Act. The Chief Electrical Inspector shall collect the royalty from the company and remit it to the State revenue. 17. INDSIL challenged the order dated 03.07.2004 by filing Writ Petition (C) No. 22187 of 2004 in the High Court. The Writ Petition was however withdrawn with liberty to make an appropriate representation to the Government. This led to some correspondence and representations from INDSIL. The Government, however, refused to recall its decision to recover royalty and cost of controlled release of water, which was communicated vide order dated 23.01.2008. The action on part of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on the controlled release of water from Sabarigiri and Kakkad Hydro Electric Project. Such controlled release, quantum of release and cessation of same are all made suited to the requirement of the project in question. Release of water was utilized by Messrs Carborundum Universal Limited for the purpose of generating power in the Maniyar Hydro Electric Project. Water released from Sabarigiri and Kakkad Power Project are controlled releases. This is totally unlike in the case of the Petitioner where the actual release of water from Anayirankal is in the manner mentioned above. 19. The reply given on behalf of the Government to the petition by INDSIL was: 9. ... ... In fact, the scheme envisages utilization of controlled release from Anayirankal reservoir in addition to water from 114 sq.km., free catchment downstream of the dam as per the detailed project report prepared by KSEB in August, 1991. The Petitioner had also made their own assessment as per the techno economic feasibility report submitted by them. As already mentioned, the scheme envisages utilization of water from 114 sq.km. of free catchment downstream of existing Anayirankal reservoir drained from a catchment of 65 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the exception of CUMI were not subjected to such royalty. The explanation offered that CPPs and IPPs stood on different footings was not accepted. It was concluded that there was no jurisdiction to recover any royalty or cess and accordingly the order dated 03.07.2004 was quashed. 21. O.P. No. 6880 of 2003 preferred by CUMI was allowed by the Single Judge of the High Court by his judgment and order dated 03.04.2013 with following observations: Even though in W.P.(C) No. 4596/2008, I have given some findings against the Petitioner, in view of my findings in Paragraphs 36 to 41 and 51 to 53 of the said judgment, I allow this writ petition and set aside the impugned order, Annexure P-3 holding that the Government is devoid of jurisdiction to realize any amount from the Petitioner by way of Royalty or other charges on the water used for the Maniyar Hydel Project. In the circumstances, there will be no order as to costs. 22. The decisions of the Single Judge in the matters of INDSIL and CUMI were called in question by the Board by filing Writ Appeal Nos. 1345 of 2013 and 1355 of 2013 respectively before the Division Bench, which appeals were allowed by the Division Bench vide its com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e has held that both IPP and CPP are established for the same purpose of augmenting energy generation. But the learned single Judge has lost sight of the distinguishing factor that the energy generated by the CPP of the 1st Respondent is not available for distribution to consumers and that it is only for self consumption unlike the other IPP's. Therefore, in our view, the justification that if royalty or cess or other charges are levied, the energy generated at IPP's would be more expensive to the consumer and that it was therefore that the IPP's were relieved of that obligation, is a valid reason for classification of IPP's and CPP's Under Article 14 of the Constitution of India. 26. Secondly, IPP's that are complained of by the 1st Respondent were established to Exts.P8 and P9 orders issued by the Government of Kerala in 2002 and 2003. These orders show that the terms and conditions that are incorporated in these orders are totally different from what are contained in Ext. P1, pursuant to which sanction was accorded, agreement was executed and the project was established by the 1st Respondent. Therefore, the obligations undertaken by the 1st Respondent in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Panniyar Power Project of the Board. According to him, this water is diverted by the weir across Panniyar river at Mukkudi to the Kuthungal Project and made use of these only because of the situs of the Kuthungal Project. This, according to the counsel, is only an incidental benefit and that to make them liable for controlled release, water should be released solely at their instance and for generation at their project and not otherwise. In our view, this argument has no substance. Parties are governed by a mutually agreed contract evidence by Ext. P3. Agreement provides that for the additional advantage of controlled release derived by them, the agency is liable to pay charges as provided in the agreement. Agreement does not state that such controlled release should be at the instance of the 1st Respondent and that it should be for their sole benefit. Instead, if the agency is a beneficiary of the controlled release of water, they are liable to pay for it. Admittedly, the 1st Respondent is generating energy utilizing the controlled release of water from Anayirankal and so long as it is so, in view of Clause 14 of the Ext. P1, the 1st Respondent cannot get itself absolved of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ources of water to a generating company for the generation of energy by setting up a hydel generation station against royalty or other charges payable by the grantee. Therefore, if under the contract, the Government agree to a private party like the 1st Respondent that it shall make available water to a Hydro Electric Project for generation of energy and in consideration, royalty is required to be paid to the Government and that contractual right of the Government or the obligation of the generating company to pay are not affected by any of the provisions of the Electricity (Supply) Act, 1948. Therefore, the 1st Respondent who has willingly entered into an agreement undertaking to pay royalty and other charges to the Government and after having enjoyed the benefit thereof, cannot now rely on the provisions of the Electricity (Supply) Act and contend that the Government or the Board have no power under the Electricity (Supply) Act to realise the charges that are contractually payable by them. Therefore, this contention of the learned Senior Counsel is unacceptable and is rejected. 58. The second contention raised by the learned Senior Counsel for the 1st Respondent was that there wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulatory Commission constituted between the Petitioner and KSEB is conclusive and is absolutely binding on the Petitioner. ... ... ... I. ... ... The project utilizes the water from the free catchment between Anayirankal dam and Kuthunkal weir alongwith the controlled release of water. The controlled release of water from Anayirankal dam was done by the Board through the Panniyar River depending upon the requirements of the Panniyar Power Project of the Board. This water, when released, is being utilized at Kuthungal for power generation. This controlled release of water is diverted by a weir across Panniyar River at Mukkudi to the Kuthungal project and used for generation of power. In the absence of Anayirankal reservoir, the water would have flown to Ponmudi during monsoon months and the weir would be overflowing most of the time. And during summer months there would be substantial shortfall in the generation of power at the Kuthungal project in the absence of water release from Anayirankal dam. The release of water at Anayirankal is made in the months of January, February, March and April every year and the scheme generates mostly during these months in a year and primarily gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rbitrary. 24. In Civil Appeal Nos. 9847-9850 of 2016, the grounds of appeal raised by CUMI have reiterated its submissions before the High Court. The assertions with respect to the location of the project and use of controlled release of water were: The alleged controlled release of water must be directly to the Petitioners' Maniyar Hydroelectric project from the water releasing point at Moozhiyar Power House of KSEB and not to Irrigation Dam of PWD or to its own Hydroelectric project at Moozhiar. After the year 1998, KSEB has set up its own Hydro Electric Project at Kakkad upstream of the river and two more Private Hydel Power Project had been approved and set up on the same river upstream, i.e. in between the Moozhiyar Power House of KSEB and the Petitioner's Maniyar Power Plant. It is pertinent to note that the alleged controlled release of water being used by the Board's Hydro Electric Project at Kakkad at the first instance and then flows further down to two other private Hydro Electric Projects at Ullunkal Karikkayam before it reaches the irrigation dam owned by PWD from where the Petitioner draws water for its Maniyar Hydro Electric Project. It is further to be n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oozhiyar reservoir with storage capacity of 1.16 MCM and Veluthodu reservoir with storage capacity of 0.607 MCM are the reservoirs of Kakkad Power Station. Thus, the storage capacities of the three power stations are as shown below: Sabarigiri Power House - 480.54 MCM (Effective) Kakkad Power House - 1.767 MCM (Effective) Maniyar Power House - 8.0 MCM (Gross) ............ 14.... ... The Pamba Dam across Pamba river, Kakki Dam across Kakki river and a flanking dam at Anathode are the main three dams of Sabarigiri Project. These Dams are at an elevation of about 900 M from the sea level. Water from the Kakki reservoir is brought to Sabarigiri Power House, the water is again stored at Moozhiyar by a concrete Gravity Dam. Water from other small streams like Saippinkuzhy stream also reaches this reservoir. This water is brought to Kakkad Power Station through under ground tunnel and utilized it for power generation. Water from another stream called Veluthode is also brought to Kakkad Power Station by constructing a small Dam across the stream. Before the commissioning of the Kakkad Power Station, the controlled release of water from Sabarigiri Power House directly reached the maniyar ba ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the project of INDSIL was conceived as a run of the river scheme . The release of water from Annayirankal Reservoir would be only for 45 days in a year, and the Regulation of release of water would be completely at the discretion of the Board and meant to facilitate the generation of power at the Panniyar Power Station. The release of water would be determined by the requirements of the Board at the Panniyar Power Station and that utilization of such controlled release constituted only 22.54% of the generation by the INDSIL. d) The controlled release of water in the case of CUMI would be meant to suit the requirements of its project. On the other hand, such controlled release of water would not be exclusively for the benefit of INDSIL but for the benefit of the Plant at Panniyar. It would therefore be illegal to draw similarity between the case of CUMI and that of INDSIL. e) The imposition of royalty on the use of water would be unconstitutional as INDSIL was discriminated against other similarly situated hydroelectric plants. f) Imposition of royalty in terms of Clause 19 of INDSIL Agreement would partake the nature and character of a Tax . Assuming that the royalty imposed on IND ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ors. v. Salvation Army, Western India Territory (1975) 1 SCC 509. g) Considering the facts of the case, the calculations were required to be revisited where all relevant aspects had to be properly accounted for and the levy had to be linked to the cost of advantage gained from controlled release of water and not from other sources from catchment area. 27. Mr. Jaideep Gupta and Mr. P.V. Surendranath, learned Senior Advocates appearing for the Board and the State respectively, in both the appeals, submitted: (a) Terms and conditions of the Policy including Clause 14 of the Policy stood specifically incorporated in INDSIL and CUMI Agreements. Said Clause 14 of the Policy dealt with the additional advantage gained by an agency/ project by way of controlled release of water and stipulated that the cost component for such controlled release would be required to be paid. Clause 15 of the Policy then set out the formula to be used for ascertainment of the relevant indicia. The Agreements having accepted the liability to pay such controlled release of water, the matter was purely in the realm of contract. (b) There was no unequal or unnatural bargaining so as to invoke the principles laid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted on behalf of the Appellants needs to be dealt with. It was submitted that a decision was taken on 08.04.1994 that no charges for benefit of controlled water would be imposed if the water was being retained in the same basin. The decision in said meeting was only to make a recommendation but the final call had to be taken by the Irrigation Department of the State. It cannot therefore be said that no liability could be imposed after 08.04.1994. Pertinently, INDSIL Agreement was entered into on 30.12.1994. Though no specific Clause comparable to Clause 14 of CUMI Agreement was included in INDSIL Agreement a specific reference to the terms and conditions of the policy was made and such terms and conditions were incorporated in INDSIL Agreement. Thus the decision dated 08.04.1994 had no bearing on the matter in question. 29. The first question that arises for consideration is whether the projects of CUMI and INDSIL are located at places where the advantage of controlled supply of water is assured and can be derived. 30. Hydro-Electric Projects rely on the force of fall of water from a height to enable the turbines to generate electricity. Normally, the water is supplied through pens ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thus show that both the projects have certainly derived advantage of controlled supply of water as contemplated in Clause 14 of the Policy. How much benefit of controlled supply of water each of the projects has received or will receive in future would be a matter of computation and calculation. 34. The Agreements entered into by CUMI and INDSIL show that the terms and conditions of the Policy including Clause 14 thereof were consciously incorporated in the Agreements. Both CUMI and INDSIL were alive to the fact that because of peculiar location, their units would certainly have the advantage of controlled supply of water. Thus, the absence of a specific clause, akin to Clause 14 of CUMI Agreement, in INDSIL Agreement, would be of no consequence. The relationship between the parties would be governed by Clause 14 of the Policy, as incorporated in the respective Agreements. 35. The next questions to be considered are whether Clause 14 of CUMI Agreement and Clause 14 of the Policy which stood incorporated into the respective Agreements could be termed to be unconscionable and/or manifestly arbitrary. 36. The decision of this Court in Central Inland Water Transport Corporation (1986) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form or Rules may be. This principle, however, will not apply where the bargaining power of the contracting parties is equal or almost equal. This principle may not apply where both parties are businessmen and the contract is a commercial transaction. In today's complex world of giant corporations with their vast infrastructural organizations and with the State through its instrumentalities and agencies entering into almost every branch of industry and commerce, there can be myriad situations which result in unfair and unreasonable bargains between parties possessing wholly disproportionate and unequal bargaining power. These cases can neither be enumerated nor fully illustrated. The court must judge each case on its own facts and circumstances. (Emphasis added) 37. In S.K. Jain v. State of Haryana and Anr. (2009) 4 SCC 357 a Bench of three Judges of this Court summed up as under: It is to be noted that the plea relating to unequal bargaining power was made with great emphasis based on certain observations made by this Court in Central Inland Water Transport Corporation Ltd. v. Brojo Nath Ganguly (1986) 3 SCC 156. The said decision does not in any way assist the Appellant, beca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ocess unless it complied with requirements of pre-deposit. Though this Court did not accept the submission, based on Central Inland Water Transport Corporation (1986) 3 SCC 156, that the Clause in question was unconscionable, the matter was considered from the stand point whether said Clause could be said to be manifestly arbitrary. The Clause was found to be contrary to the object of de-clogging the Court process and rendering the arbitral process ineffective. Relying upon the decision of this Court A.L. Kalra v. Project and Equipment Corporation of India (1984) 3 SCC 316 it was found in paragraph 23 that the Clause had no nexus to the filing of frivolous claims. The discussion in paragraph 23 was: 23. The important principle established by this case is that unless it is first found that the litigation that has been embarked upon is frivolous, exemplary costs or punitive damages do not follow. Clearly, therefore, a deposit-at-call of 10 per cent of the amount claimed, which can amount to large sums of money, is obviously without any direct nexus to the filing of frivolous claims, as it applies to all claims (frivolous or otherwise) made at the very threshold. A 10 per cent deposit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iven to a private entity or agency, the Policy contemplated imposition of charges for the use of such controlled supply of water. There is nothing arbitrary or unreasonable in having such term in the Policy. Since the private entity or agency would stand to gain from and out of the capital outlay and infrastructure put in place by the State, some reasonable charges for such benefit would naturally be imposed. It was only under such Policy that both CUMI and INDSIL were given permissions to set up their electricity generating units and such term was consciously accepted by them. The submission that the relevant Clause would be manifestly arbitrary, therefore, does not merit acceptance. 43. Though we have considered the submissions that Clause 14 of the Policy would be unconscionable or arbitrary on merits, reference may also be made to the following statement of law culled out in Rajasthan State Industrial Development and Investment Corporation and Anr. v. Diamond and Gem Development Corporation Limited and Anr. (2013) 5 SCC 470: 15. A party cannot be permitted to blow hot-blow cold , fast and loose or approbate and reprobate . Where one knowingly accepts the benefits of a contract, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... set of submissions challenging the imposition of royalty or charges on controlled supply of water on the ground of absence or lack of jurisdiction and some ancillary issues. The matter in that behalf was considered by the Division Bench of the High Court in paragraphs 38, 39 and 57 as quoted hereinabove. As rightly observed, the basis or genesis of such imposition was Clause 14 of the Policy which, as agreed between the parties, stood incorporated in the respective Agreements. 46. The submission on behalf of the Appellants was that the royalty or charges for controlled supply of water in the instant case would be nothing but compulsory exaction and in the absence of any statutory sanction behind such imposition, the actions on part of the Board would be without jurisdiction. The counter submission on behalf of the State and the Board was that such royalty or charges had the genesis in respective contracts and as such the action on part of the Board was fully justified. 47. The distinction between tax and fee was brought out by the Constitution Bench of this Court in Hingir-Rampur Coal Co. Ltd. and Ors. v. State of Orissa and Ors. (1961) 2 SCR 537 as under: The first question which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthority. In regard to fees there is, and must always be, co-relation between the fee collected and the service intended to be rendered. Cases may arise where under the guise of levying a fee Legislature may attempt to impose a tax; and in the case of such a colourable exercise of legislative power courts would have to scrutinise the scheme of the levy very carefully and determine whether in fact there is a co-relation between the service and the levy, or whether the levy is either not correlated with service or is levied to such an excessive extent as to be a pretence of a fee and not a fee in reality. In other words, whether or not a particular cess levied by a statute amounts to a fee or tax would always be a question of fact to be determined in the circumstances of each case. The distinction between a tax and a fee is, however, important, and it is recognised by the Constitution. Several Entries in the Three Lists empower the appropriate Legislatures to levy taxes; but apart from the power to levy taxes thus conferred each List specifically refers to the power to levy fees in respect of any of the matters covered in the said List excluding of course the fees taken in any Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not merged in the general public revenue and are not appropriated in the manner laid down for appropriation of expenses for other public purposes. They go to constitute a fund which is contemplated by Section 50 of the Act, and this fund to which the Provincial Government contributes both by way of loan and grant is specifically set apart for the rendering of services involved in carrying out the provisions of the Act. The same view was taken by this Court in regard to Section 58 of the Bombay Public Trust Act, 1950 (Act 29 of 1950) which imposed a similar contribution for a similar purpose in Ratilal Panachand Gandhi v. State of Bombay (1954) S.C.R. 1055. It would thus be seen that the tests which have to be applied in determining the character of any impugned levy have been laid down by this Court in these three decisions; and it is in the light of these tests that we have to consider the merits of the rival contentions raised before us in the present petition. 48. In State of West Bengal v. Kesoram Industries Limited and Ors. (2004) 10 SCC 201, another Constitution Bench of this Court explained certain observations in India Cement Limited v. State of Tamil Nadu (1990) 1 SCC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee's right to mine or drill on the land. Mineral royalty.--A right to a share of income from mineral production. 60. In D.K. Trivedi Sons v. State of Gujarat (1986) Supp SCC 20 a Bench of two learned Judges of this Court dealt with rent , royalty and dead rent and held as follows: (SCC pp. 53-54, paras 38-39) 38. Rent is an integral part of the concept of a lease. It is the consideration moving from the lessee to the lessor for demise of the property to him. ... ... ... 39. In a mining lease the consideration usually moving from the lessee to the lessor is the rent for the area leased (often called surface rent), dead rent and royalty. Since the mining lease confers upon the lessee the right not merely to enjoy the property as under an ordinary lease but also to extract minerals from the land and to appropriate them for his own use or benefit, in addition to the usual rent for the area demised, the lessee is required to pay a certain amount in respect of the minerals extracted proportionate to the quantity so extracted. Such payment is called 'royalty'. It may, however, be that the mine is not worked properly so as not to yield enough return to the lessor in the shap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... charge royalty but not tax. The lessor receives royalty as his income and for the lessee the royalty paid is an expenditure incurred. Royalty cannot be tax. We declare that even in India Cement (1990) 1 SCC 12 it was not the finding of the Court that royalty is a tax. A statement caused by an apparent typographical or inadvertent error in a judgment of the Court should not be misunderstood as declaration of such law by the Court. We also record our express dissent with that part of the judgment in Mahalaxmi Fabric Mills Ltd. 1995 Supp (1) SCC 642 which says (vide para 12 of SCC report) that there was no typographical error in India Cement (1990) 1 SCC 12 and that the said conclusion that royalty is a tax logically flew from the earlier paragraphs of the judgment. 49. In State of Himachal Pradesh and Ors. v. Gujarat Ambuja Cement Ltd. and Anr. (2005) 6 SCC 499, a Bench of three Judges of this Court observed: 44. Royalty is not a term used in legal parlance for the price of the goods sold. It is a payment reserved by the grantor of a patent, lease of a mine or similar right, and payable proportionately to the use made of the right by the grantee as held in Titaghur Paper Mills Co. Lt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the essence of taxation is compulsion, that is to say, it is imposed under statutory power without the taxpayer's consent and the payment is enforced by law. The second characteristic of tax is that it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax. This is expressed by saying that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State. As the object of a tax is, not to confer any special benefit upon any particular individual there is as it is said, no element of quid pro quo between the taxpayer and the public authority.... Another feature of taxation is that as it is a part of the common burden, the quantum of imposition upon the taxpayer depends generally upon his capacity to pay. 51. It is true that as a result of order passed by this Court in Mineral Area Development Authority and Ors. v. Steel Authority of India and Ors. (2011) 4 SCC 450, certain questions concerning royalty as determined under the provisions of Mines and Minerals (Development and Regulation) Act, 1957 now stand referred to a Bench of nine Judges, which referen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) 6 SCC 150, where the payment of fee was under the terms of a contract between the parties. 31. The exhibitors also contend that the charge of one per cent on the net recoveries is a compulsory exaction in the form of a tax. Neither the Act nor the provisions of the licence stipulate payment of any such tax. Hence imposition of this amount is in violation of Article 265 of the Constitution. It is true that neither the relevant Act nor the notification nor the Rules nor the terms and conditions of the licence stipulate the payment of any rental. This amount is required to be paid under an agreement which the exhibitors individually enter into with the Films Division for the supply of these films. It is a payment under the terms of a contract between the two parties. It cannot, therefore, be viewed as a tax at all. The exhibitors contend that because they are required to enter into these agreements, any payment under the agreement is a compulsory exaction and is, therefore, tax. We do not agree. Under the terms of the agreement, the Films Division has to supply certain prints to the theatre owners at stated intervals. The Films Division is required to maintain a distribution network ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... This is clearly an agreed fee charged for rendering services. It cannot be viewed as a compulsory exaction or as a tax. There is a statutory obligation which is cast on the exhibitors to exhibit certain films. To carry out this statutory obligation, if the exhibitors enter into an agreement with the Films Division and agree to pay a certain amount of rental for procuring the films from the Films Division to comply with the statutory obligation, the levy must, since it is correlated with the Films Division discharging certain obligations under the contract, be viewed, at the highest, as a fee and not as a tax. It is an agreed payment, and is not unreasonable. The High Court has rightly negatived the contention of the Respondent exhibitors. 54. Thus, the expression 'Royalty' has consistently been construed to be compensation paid for rights and privileges enjoyed by the grantee and normally has its genesis in the agreement entered into between the grantor and the grantee. As against tax which is imposed under a statutory power without reference to any special benefit to be conferred on the payer of the tax, the royalty would be in terms of the agreement between the parties an ..... X X X X Extracts X X X X X X X X Extracts X X X X
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