Royalty a compensation for rights, privileges; tax a levy under law without any benefit: Supreme Court

The Supreme Court on Monday upheld the royalty/ charges levied by Kerala government from two companies as compensation for controlled release of river water, enabling them to generate electricity for their private consumption (Indsil Hydro Power and Manganese Limited v. State of Kerala)..The argument by the two companies, Indsil Hydro Power and Manganese Limited (INDSIL) and Carborundum Universal Limited (CUMI) that such charges amounted to compulsory exaction and thus assumed the characteristics of a tax, was turned down by the Court (Indsil Hydro Power and Manganese v. State of Kerala)..The Bench of Justices UU Lalit and Vineet Saran held that the basis for such charges was the arrangement entered into between the parties and was in the nature of royalty and not tax.“The controlled release of water made available to INDSIL and CUMI, has always gone a long way in helping them in generation of electricity. For such benefit or privilege conferred upon them, the Agreements arrived at between the parties contemplated payment of charges for such conferral of advantage. Such charges, in our view, were perfectly justified,” the Court said..In this regard, the Court also sought to distinguish between tax and royalty.“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 and normally has direct relationship with the benefit or privilege conferred upon the grantee,” the judgment said..INDSIL and CUMI had set up hydro electric projects on rivers after the State government came up with a policy allowing private agencies and public undertakings to set up hydel schemes for generation of electricity at their own cost.The projects set up were governed by agreements between the governments and the companies. The agreement had clauses which provided for payment of royalty by the companies for controlled release of water.These two projects were under the category of Captive Power Producers (CPP) since the power produced were used by the companies for their own needs.They stood distinguished as against Independent Power Producers (IPP) who generate electricity not for self-consumption but for supply in its entirety to the Kerala State Electricity Board (KSEB).Later, the government issued revised guidelines as per which IPPs were exempt from paying water cess..This and other factors prompted the two companies to move the Kerala High Court challenging imposition of royalty.A single-judge of the Kerala High Court allowed the plea while a Division Bench overturned the single-judge decision.This led to the two companies approaching the Supreme Court.Regarding the distinction between CPPs and IPPs which was one of the primary contentions of the two companies, the Court said that IPPs produce electricity not for self-consumption but for the use of the Board unlike CPPs which produce electricity for themselves..“The electricity generated by IPPs becomes part of the grid of the Board to be supplied by the Board to its consumers like electricity produced by the generating units or power houses of the Board. If the charges towards controlled supply of water were to be imposed uniformly for CPPs and IPPs, the effect would be that the electricity supplied through IPPs to common consumers and general public would necessarily have an additional burden or load towards proportionate element of water charges,” the Court noted.In these circumstances, if the Board decided not to apply royalty in case of all IPPs, such decision could not be termed as discriminatory, the Court held.The distinction or classification brought out was based on a clear rationale with the object of reducing the additional burden on the consumers, it said.The Court also turned down the contention that the royalty was compulsory extraction and amounted to tax. It noted that the royalty was provided for in the agreements.“Whatever be the nomenclature, the charges for use of controlled release of water in the present cases were for the privilege enjoyed by INDSIL and CUMI,” the Court said dismissing the appeals..[Read Judgment]