Indsil Hydro Power and Manganese Limited v. State of Kerala

9. The respective projects were thus set up by CUMI and INDSIL for Captive Power Consumption and such producers of electricity for own consumption are called Captive Power Producers (CPP) as against Independent Power Producers (IPP) who generate electricity not for self consumption but for supply in its entirety to the Board.

10. On 11.10.2002, Guidelines were issued by the Government after noting the Policy and the recommendations of the Empowered Committee set up vide G.O. dated 5.9.2002. These Guidelines dealt with transmission and distribution losses in wheeling the energy to CPPs but did not deal with royalty for the use of water. The relevant portion of these Guidelines was: - “The Empowered Committee constituted as per the GO read as 3rd paper above, to oversee the implementation of the reforms of the KSEB and to examine the details for the erection of Small and Mini Hydel Projects, in its meeting held on 5.9.02 and 12.09.02 considered the scope for taking small hydel projects and recommended to Government that the small hydel projects excluding dam toe and tail race projects should be opened up for captive consumers and Independent Power Producers including public sector undertakings and also made the following recommendations:-

1. The Public Sector undertakings and the power intensive industries within the State may be given preference in allotment of the small hydro projects.

2. The allowance to KSEB to compensate the T & D loss in wheeling the energy from generating station to the consumption point of Captive Power Producers (CPPs) which has been fixed at 10% as per clause (9) of the G.O. (MS) No.23/90/PD dt.7.12.90 may continue to be allowed to KSEB.

3. Wheeling charges to KSEB which has been fixed at 2% as per clause (9) of G.O. (MS No.23/90/PD. dt. 7.12.90 may be increased to 5%.”

11. The Guidelines were revised vide G.O. dated 16.1.2003 which dealt with CPPs and IPPs. As regards CPPs the revised Guidelines stated: - “…… As per G.O. (MS) 23/90/PD dt.7.12.1990, Government laid down terms and conditions for allotment of small hydel projects. Since the Government proposes to invite more private participation in this sector, it has become necessary to prescribe revised guidelines for allotment. Power schemes utilizing controlled releases form the existing reservoirs and tailrace are reserved for KSE Board.” Nothing was specified with regard to the royalty for the use of water by CPPs but while dealing with IPPs, it was stipulated: - “…15. Water Cess: Water Cess not required since, it will 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 Project of CUMI. INDSIL: Anayirankal Dam, one of the largest earthen dams in State of Kerala was built in the 1960s and soon thereafter, the Paniyar Power House having capacity of generating 32 MW electricity was built by the Board. Kuthungal is situated in between Anayirankal Dam (at the higher altitude) and Paniyar Power Station of the Board (at the lower level). Thus the water released from Anayirankal Dam for generation of electricity at Paniyar Power Station passes through the area where the project of INDSIL is situated.

13. CUMI filed O.P. No.6880 of 2003 praying, inter alia, that the Board had no authority to levy, demand or collect any charges for controlled release of water or royalty from CUMI in respect of electricity generated by it at its Maniyar Hydel Project. The necessary pleadings from the writ petition were:

14. In the counter affidavit filed on behalf of the Board, the assertions made by CUMI in the writ petition were denied. It was submitted: “2…… In the Ext.P[1] Government Order dated 07.12.1990, it is clearly stated in Clause 21 that before implementation of the scheme, an agreement setting forth all the aspects in the Government Order and such conditions as found necessary will be entered into between the agency on the one part and the KSE Board/Government on the other. Hence the allegation of the petitioner that the 2nd respondent has no authority of law or competency to stipulate or impose any conditions or agreement is not true. Moreover, the respondents have not compelled the petitioner to sign the agreement and hence the allegation in this regard are not true and hence denied. The petitioner has applied for the captive generation station in pursuance of the Ext.P[1] Government Order dated 07.12.1990 and the Government have granted permission strictly in accordance with stipulation in the above said Government Order. Having executed the agreement and setting 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 royalty of water if any, to be paid. The tariff storage/controlled release as above are to be worked out in respect of each scheme separately taking into account the above factors.

5. It is submitted that from the year 1998, the water flowing down from Moozhiyar Power House is collected in the reservoir of Kakkad Power House of the 2nd respondent and after generation of electricity at Kakkad Power House the water flowing down to the same river and to the reservoir of the petitioner’s Maniyar Project. Thus, the water released from the Moozhiyar Power is further controlled at Kakkad Power House. Maniyar Project thus runs with the controlled release of water from the Kakkad Power House which was commissioned after setting up of the Maniyar Hydro Electric Project. Water utilized for generation in their project is from absolute controlled release if it was either from Moozhiyar Power House or later on form Kakkad Power House and hence the allegation that charge and collection of cost compound from the petitioner after 1998 is totally without authority of law, arbitrary, illegal and unfair is baseless and untenable.”

15. In its rejoinder to the aforestated counter affidavit, CUMI submitted:

6. … … Whatever quality of water used at the Kakkad Power House can only flow down and cannot be prevented by the 2nd respondent from flowing down. There is no question of controlling the water that has to flow down from the power house to the river. In addition to the water flowing down that Kakkad Power Station large quantity of water flows into the river from the river banks flooding the river during heavy rains and there is no control on the flow of water to the petitioner’s Maniyar generating station, which is about 6 kms. downstream from Kakkad generating station.”

16. On 03.07.2004 an order was issued by the Government that in terms of Clause 19 of INDSIL Agreement, INDSIL would be liable to pay royalty and cost of controlled release of water. The order stated: “The Kuthungal HEP (21 MW) is a CPP implemented by M/s INDSIL. The project utilizes the water available from the free catchment between Anayirankal Dam and Kuthungal weir as well as the controlled releases from Anayirankal Dam. The Maniyar HEP (12 MW) the first CPP owned by M/s. Carbourandum Universal utilizes the controlled releases from Sabarigiri and Kakkad Hydro Electric Project of KSEB. The royalty for this 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.

(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 the Government was challenged by INDSIL by filing Writ Petition (C) No.4596 of 2008 in the High Court.

18. With regard to the use of controlled water INDSIL submitted:-

19. The reply given on behalf of the Government to the petition by INDSIL was:-

12. … … Even though the controlled release of water from Anayirankal reservoir is made to suit the requirement of power generation at Panniyar, it is also utilized for power generation at Kuthungal Hydro Electric Project. It is to be noted that the power generation from the Kuthungal Project was comparatively high when there is water releases from the Anayirankal reservoir, which would otherwise have been negligible if water from Anayirankal reservoir is not released. During this period a total generation was 266.69 MU and generation from controlled released is 60.12 MU, which is about 22.54% of the total generation. During the drought year of 2002-03, 50% of the total generation from the project was during summer months utilizing water release from Anayirankal. The above facts clearly establishes that the petitioner is a beneficiary of the controlled release of water from Anayirankal.”

20. Writ Petition (C) No. 4596 of 2008 preferred by INDSIL was allowed by the Single Judge of the High Court by his judgment and order dated 15.02.2013. It was observed that the action on the part of the Government was discriminatory, as all CPPs with 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 common judgment and order dated 03.04.2014. The judgment of the Division Bench comprises of two parts: the first part dealt with the case of INDSIL; while the second part considered the case of CUMI. 22.[1] After considering some of the decisions of this Court, it was held that after entering into an agreement, a party would be estopped from disputing its liability in terms of the agreement. With regard to the submission based on discrimination, the Division Bench observed:-

23.

INDSIL being aggrieved, filed Civil Appeals Nos.9845-9846 of 2016 reiterating its submissions advanced in the High Court. In the response filed on behalf of the Government, it was submitted inter alia:-

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 generates power out of the water released from Anayirankal. The total generation of power during this period was 266.69 MU and generation from controlled release was 60.12 MU, which is about 22.54% of the total generation. The Petitioner is getting the full advantage of power generation from the release of water from Anayirankal reservoir in the peak summer months. In the drought year of 2002-03, 50% of the total generation from the project was during summer months by utilizing the water from Anayirankal dam.” 23.[1] In the affidavit in rejoinder, it was submitted by the INDSIL:- “That Respondent no.1 & 2 have further drawn distinction on the fact that the petitioner’s project is based on controlled release of water from the Anayirankal dam while the other 59 projects are not based on any controlled release. It is submitted that the petitioner’s project is not based on controlled release of water and therefore there is no question of the petitioner utilizing the State’s natural resources with controlled release of water from Anayirankal dam for our exclusive benefits. It is submitted that wherever the State Government has entered into a contract with a party like M/s Carborandum’s project, involving controlled release of water, it has provided a specific clause to this effect since it would involve incurring of cost for providing the services. It is submitted that in the case of the petitioner’s, no such clause is provided and it is for this reason that the State Government specifically agreed in the meeting dated 8th April, 1994 that water cess for the use of water would not be charged. It is thus submitted that the petitioner is being discriminated against by respondent no.1 & 2 in the facts of the instant case in grave violation of its fundamental rights guaranteed under Article 14 of the Constitution of India.

7. it is pertinent to mention here that respondent no.1 & 2 have imposed the same rate of royalty on Carborundum’s project and that of the petitioner’s. It is submitted that it is an admitted fact that Carborundum’s Project is based on controlled release. In the Petitioner’s case, there is no such controlled release. Further, on an average, only 22.54% of the petitioner’s generation comes from the alleged controlled release. It is submitted that on this ground alone, the levy put on the petitioner is unreasonable and arbitrary.”

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 noticed that when the flow of the controlled release of water further strengthened by two more minor rivers and forms confluence on its way of flowing further down along with the other source of water from the catchment area of 237 square kilometers as evidence by the map on record.” 24.[1] In the affidavit in reply filed by the Board, it was stated:-

25. Mr. V. Giri, learned Senior Advocate for INDSIL submitted:a) Clause 14 of CUMI Agreement was distinct and different from Clause 19 of INDSIL Agreement. Further, the matter was required to be seen in the light of the decision dated 08.04.1994 and imposition of royalty on the use of water would be in contravention of the decision dated 08.04.1994. b) No explanation was forthcoming as to why, as against specific inclusion of Clause 14 in CUMI Agreement, no such provision was made in INDSIL Agreement. c) Being at a lower level than the Anayirankal Reservoir but higher than the Paniyar Power Station, 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 Paniyar Power Station. The release of water would be determined by the requirements of the Board at the Paniyar 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 Paniyar. 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 INDSIL had genesis in a contract, no decision was taken by the Government as contemplated under said Clause 19. g) Assuming that the terms of the Policy were incorporated into INDSIL Agreement, the tariff for storage/controlled release was required to be worked out in respect of each scheme separately.

26. Appearing for CUMI, Mr. C.A. Sundaram, learned Senior Advocate submitted:a) When its Agreement was entered into, CUMI was the only Power Project in private sector and as such, there was no question of any discrimination. However, the discrimination arose when other Power Projects were given the benefit of controlled release of water without any charge. b) There could be no distinction between CPPs and IPPs. Guidelines of 2002 as revised did not make any such distinction. The basis for levy was the advantage gained from controlled release of water. Therefore, the differentia could be between those having the benefit of controlled release of water on one hand and those not having such advantage on the other. Any other distinction such as CPPs as against IPPs would be unnatural and irrational. c) Even if, the relevant Clause in the Agreement was a negotiated Clause, said Clause being arbitrary or discriminatory was liable to be struck down. Reliance was placed on the decision of this Court in Central Inland Water Transport Corporation vs. Brojo Nath Ganguly[4], ICOMM Tele Limited v. Punjab State Water Supply and Sewerage Board and Anr.[5] and Pioneer Urban Land and Infrastructure Ltd. v. Govindan Raghavan[6]. d) The Power Plant of CUMI had been receiving water not just from Sabarigiri and Moozhiyar reservoirs but also from the streams in the catchment area. Thus, the entirety of the supply of water to CUMI could not be treated as controlled water from Moozhiyar Power House of the Board. e) The relevant Clause in CUMI Agreement would, at best, attract levy of charges for controlled release of water on the cost component thereof. Therefore, the stipulation in Clause 14 of CUMI Agreement providing 10% of tariff for the electricity generated was ultra vires the Policy. f) Further, the levy in question had to be commensurate with the service rendered, otherwise, it would cease to be a fee and would be wholly beyond the competence of the Board. Reliance was placed upon the decision of this Court in the State of Maharashtra & Ors. vs. Salvation Army, Western India Territory[7]. 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 down in some of the decisions of this Court. Both CUMI and INDSIL had willingly accepted the liability to pay for the use of controlled release of water. It was a commercial contract which was entered into after due negotiations.

(c) The location of the projects of CUMI and INDSIL as well as the facts on record would show that both the projects were enjoying the benefit of controlled supply of water. CUMI had been enjoying the benefit of “tail race” water discharge flowing down from Moozhiyar Power House of the Board while INDSIL Project had been enjoying the advantage of controlled supply of water discharge from Anayirankal Dam.

(d) Clause 14 of the Policy had stipulated that normally such benefits of existing reservoirs and “tail race” benefit of existing power stations would not be entrusted with private agencies but in case under special circumstances such schemes were allowed to the private parties, they would have to pay charges for controlled release of water. (e) Unlike the projects which would depend upon irregular and intermittent supply of water, the assured and controlled supply of water enabled smooth running of the turbines for generation of electricity. Such assured supply was the element based on which the terms of the Policy were incorporated in the Agreements and liability was accepted. (f) Having agreed to abide by the terms of the Policy including Clause 14 of the Policy, it would not be open to CUMI and INDSIL to submit that imposition of charges for controlled supply of water would be discriminatory and irrational. (g) Even if there was no specific clause in INDSIL Agreement similar to Clause 14 in CUMI Agreement, Clause 19 of INDSIL Agreement read with the terms of the Policy made the situation quite clear and there would be no escape from the liability to pay the charges for controlled release of water. (h) There was no inter se distinction between INDSIL on one hand and CUMI on the other. Both had been enjoying benefits of controlled release of water and their cases came within the ambit of Clause 14 of the Policy.

(i) The charges payable for controlled release of water had their genesis in the Policy and the terms of the Agreements. The submissions on the part of CUMI and INDSIL that it would amount to compulsory exaction was therefore without any merit.

28. Before we deal with the principal submissions, an aspect of the matter highlighted 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 penstocks from a reservoir. The stored water from a reservoir assures consistent and regular supply of water for the smooth functioning of the generating units. The supply of water from a large reservoir is one way of ensuring consistent and controlled supply of water. However, because of topography, large reservoirs are not always close to a generating unit. In such cases, the water from a large reservoir located at a greater height is steadily released and collected in a smaller reservoir or a weir from which the water is thereafter supplied to the generating units; and depletion in the stock of water is regularly replenished from the large reservoir. This is another way of ensuring consistent and controlled supply of water for generation of electricity. After the force of the water is used for propelling the turbines, the water is discharged from the generating unit or powerhouse. Such discharge of water or “tail race” benefit will also be consistent, depending upon the supply of water that such generating unit or powerhouse receives. If another generating unit is at a lower level than such powerhouse, the discharge from the powerhouse at a higher attitude may itself assume and ensure consistent supply of water to the generating unit at a lower level or altitude.

31. The location of the project of CUMI is at a place where the discharge of water from Moozhiyar Power House of the Board is diverted to Kakkad Power House of the Board, which gets steady supply of water in the form of “tail race” benefit of the Moozhiyar Power House. After generation of electricity at the Kakkad Power House, the water is allowed to flow back into the river. The capacity of Kakkad Power House is 50 MW while that of CUMI is 12 MW. The supply of water even if meant for a powerhouse situated at a height and with larger capacity thus definitely ensures consistent and controlled supply of water to the project of CUMI located at a lower altitude.

32. Similarly, the water from a larger reservoir namely, Anayirankal Dam is allowed to flow so as to reach Paniyar Power House having a capacity of 32 MW electricity. Before reaching Paniyar Power House, the water passes through the area where the project of INDSIL is situated, which has a capacity of 21 MW. The location of the project of INDSIL would thus have natural advantage of consistent and controlled supply of water.

33. The facts on record 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[4] which was pressed in service, was in relation to terms in a Contract of Employment. This Court found that such term would get included in the contract only at the instance of the employer where because of lack of bargaining power the employee would have no other option but to accept such term. It was in this context that the relevant term contained in the Contract of Employement was found to be unconscionable. At the same time, the principles which weighed with the Court for holding such terms unconscionable were specifically stated to be inapplicable in cases of commercial contracts. The relevant discussion in paragraph 89 of the decision was:- “89. … …The Constitution was enacted to secure to all the citizens of this country social and economic justice. Article 14 of the Constitution guarantees to all persons equality before the law and the equal protection of the laws. The principle deducible from the above discussions on this part of the case is in consonance with right and reason, intended to secure social and economic justice and conforms to the mandate of the great equality clause in Article 14. This principle is that the courts will not enforce and will, when called upon to do so, strike down an unfair and unreasonable contract, or an unfair and unreasonable clause in a contract, entered into between parties who are not equal in bargaining power. It is difficult to give an exhaustive list of all bargains of this type. No court can visualize the different situations which can arise in the affairs of men. One can only attempt to give some illustrations. For instance, the above principle will apply where the inequality of bargaining power is the result of the great disparity in the economic strength of the contracting parties. It will apply where the inequality is the result of circumstances, whether of the creation of the parties or not. It will apply to situations in which the weaker party is in a position in which he can obtain goods or services or means of livelihood only upon the terms imposed by the stronger party or go without them. It will also apply where a man has no choice, or rather no meaningful choice, but to give his assent to a contract or to sign on the dotted line in a prescribed or standard form or to accept a set of rules as part of the contract, however unfair, unreasonable and unconscionable a clause in that contract or 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 another[8] 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 Corpn. Ltd. v. Brojo Nath Ganguly[4]. The said decision does not in any way assist the appellant, because at para 89 it has been clearly stated that the concept of unequal bargaining power has no application in case of commercial contracts.

38. To similar effect, were the observations by this Court in ICOMM Tele Limited[5], where this Court held:-

39. In Pioneer Urban Land and Infrastructure Ltd[6], certain terms in the agreements entered into between the flat purchasers and the builder were ex facie found to be one sided, unfair and unreasonable. Relying on the decision of this Court in Central Inland Water Transport Corporation[4], it was held that the terms of the agreements would not bind the flat purchasers.

40. The law is thus clear that in 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[4] 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 accept such term. Therefore, the concerned Clause in CUMI Agreement as well as the terms of the Policy that stood incorporated in the respective Agreements, cannot be termed unconscionable.

41. In ICOMM Tele Limited[5], this Court found Clause 25 (viii) of the Notice Inviting Tender to be arbitrary as said clause deterred a party to an arbitration agreement from invoking the alternative dispute resolution process unless it complied with requirements of pre-deposit. Though this Court did not accept the submission, based on Central Inland Water Transport Corporation[4], 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[9] it was found in paragraph 23 that the clause had no nexus to the filing of frivolous claims. The discussion in paragraph 23 was:

42. On the touchstone of these principles, it needs to be seen whether Clause 14 of the Policy can be termed to be manifestly arbitrary. The Policy had made it quite clear that the benefit of controlled supply of water would normally be confined to the electricity generating units or power houses in public sector. The reason for such Policy statement would clearly be that considerable amount of insfrastructure and development had been and would be made by the State in erecting and maintaining dams and reservoirs and as such the incremental advantage or benefit of such investment must go back to the public through units in public sector. If the advantage was, however, allowed to be given to a private entity or agency, the Policy contemplated impostion 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 Another vs. Diamond and Gem Development Corporation Limited and Another10:-

44. Moving further, even if the relevant term in the Policy is not found to be unconscionable or arbitrary and is found to be perfectly justified, the question still remains whether in the application of said term to CPPs alone and not to IPPs, was any discriminatory treatment meted out to CPPs. Qualitatively, the CPPs and IPPs have a basic distinction. CPPs produce electricity for self consumption. In the present case both CUMI and INDSIL generate electricity to be consumed in their factories or industrial units. Under the terms of their Agreements, if anything is produced in excess of their requirements, the surplus or excess electricity would be accepted by the Board. However, the principal purpose and end use would be self consumption. As against that, IPPs produce electricity not for self consumption but for the use of the Board. 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. In these circumstances, if the Board decided not to apply Clause 14 of the Policy in case of all IPPs, such decision would not be termed as discriminatory. The distinction or classification brought out was based on a clear rationale with the object of reducing the additional burden on the consumers. Since the electricity generated by CPPs would be self consumed, there would be no such question of putting any ultimate or resultant burden on the common consumers. The basis for such distinction or classification was quite correct and as such this question was rightly answered by the Division Bench of the High Court against CUMI and INDSIL. Rather than being unnatural or irrational, the classification had a clear nexus or relationship with the object of reducing resultant burden on the common consumers. This submission therefore, is, meritless and rejected.

45. This takes us to the last 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 ancilliary 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 royality 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 Others vs. State of Orissa and Others11 as under:- “The first question which falls for consideration is whether the levy imposed by the impugned Act amounts to a fee relatable to Entry 23 read with Entry 66 in List II. Before we deal with this question it is necessary to consider the difference between the concept of tax and that of a fee. The neat and terse definition of tax which has been given by Latham, C.J., in Matthews v. Chicory Marketing Board12 is often cited as a classic on this subject. “A tax”, said Latham, C.J., “is a compulsory exaction of money by (1961) 2 SCR 537 (1938) 60 C.L.R. 263, 276 public authority for public purposes enforceable by law, and is not payment for services rendered”. In bringing out the essential features of a tax this definition also assists in distinguishing a tax from a fee. It is true that between a tax and a fee there is no generic difference. Both are compulsory exactions of money by public authorities; but whereas a tax is imposed for public purposes and is not, and need not, be supported by any consideration of service rendered in return, a fee is levied essentially for services rendered and as such there is an element of quid pro quo between the person who pays the fee and the public authority which imposes it. If specific services are rendered to a specific area or to a specific class of persons or trade or business in any local area, and as a condition precedent for the said services or in return for them cess is levied against the said area or the said class of persons or trade or business the cess is distinguishable from a tax and is described as a fee. Tax recovered by public authority invariably goes into the consolidated fund which ultimately is utilised for all public purposes, whereas a cess levied by way of fee is not intended to be, and does not become, a part of the consolidated fund. It is earmarked and set apart for the purpose of services for which it is levied. There is, however, an element of compulsion in the imposition of both tax and fee. When the Legislature decides to render a specific service to any area or to any class of persons, it is not open to the said area or to the said class of persons to plead that they do not want the service and therefore they should be exempted from the payment of the cess. Though there is an element of quid pro quo between the tax payer and the public authority there is no option to the tax-payer in the matter of receiving the service determined by public authority. In regard to fees there is, and must always be, corelation 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 corelated 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. The question about the distinction between a tax and a fee has been considered by this Court in three decisions in

1954. In Commissioner, Hindu Religious Endowments, Madras v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 the vires of the Madras Hindu Religious and Charitable Endowments Act, 1951 (Madras Act 19 of 1951), came to be examined. Amongst the sections challenged was Section 76(1). Under this section every religious institution had to pay to the Government annual contribution not exceeding 5% of its income for the services rendered to it by the said Government; and the argument was that the contribution thus exacted was not a fee but a tax and as such outside the competence of the State Legislature. In dealing with this argument Mukherjee, J., as he then was, cited the definition of tax given by Latham, C.J., in the case of Matthews14 and has elaborately considered the distinction between a tax and a fee. The learned Judge examined the scheme of the Act and observed that “the material fact which negatives the theory of fees in the present case is that the money raised by the levy of the contribution is not earmarked or specified for defraying the expense that the Government has to incur in performing the services. All the collections go to the consolidated fund of the State and all the expenses have to (1954) S.C.R. 1005 (1938) 60 C.L.R. 263 be met not out of those collections but out of the general revenues by a proper method of appropriation as is done in the case of other Government expenses”. The learned Judge no doubt added that the said circumstance was not conclusive and pointed out that in fact there was a total absence of any co-relation between the expenses incurred by the Government and the amount raised by contribution. That is why Section 76(1) was struck down as ultra vires. The same point arose before this Court in respect of the Orissa Hindu Religious Endowments Act, 1939, as amended by amending Act 2 of 1952 in Mahant Sri Jagannath Ramanuj Das v. State of Orissa15. Mukherjea, J., who again spoke for the Court, upheld the validity of Section 49 which imposed the liability to pay the specified contribution on every Mutt or temple having an annual income exceeding Rs 250 for services rendered by the State Government. The scheme of the impugned Act was examined and it was noticed that the collections made under it 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. 12. 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 Bombay16. 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.” (1954) S.C.R. 1046 (1954) S.C.R. 1055

48. In State of West Bengal vs. Kesoram Industries Limited and Ors.17, another Constitution Bench of this Court explained certain observations in India Cement Limited vs. State of Tamil Nadu18, and stated as under:-

60. In D.K. Trivedi & Sons v. State of Gujarat19 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)

In H.R.S. Murthy v. Collector of Chittoor20 too the Constitution Bench of this Court had defined royalty to mean “the payment made for the materials or minerals won from the land”.

61. The judicial opinion as prevailing amongst the High Courts may be noticed. A Full Bench of the High Court of Orissa held in Laxmi Narayan Agarwalla v. State of Orissa21: (AIR p. 224, para 12) “[R]oyalty is the payment made for the minerals extracted. It is not tax.” In Surajdin Laxmanlal v. State of M.P., Nagpur22 a Division Bench of the High Court of Madhya Pradesh referred to Wharton’s Law Lexicon and Mozley & Whiteley’s Law Dictionary and said (at AIR p. 130, para 7) “royalties are payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government”. The High Court opined that there are two important features of royalty: (i) the payment is in proportion to the quantity removed; and (ii) the basis of the payment is an agreement. … … …

71. We have clearly pointed out the said error, as we are fully convinced in that regard and feel ourselves obliged constitutionally, legally and morally to do so, lest the said error should cause any further harm to the trend of jurisprudential thought centring around the meaning of “royalty”. We hold that royalty is not tax. Royalty is paid to the owner of land who may be a private person and may not necessarily be a State. A private person owning the land is entitled to 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 Cement23 it was not the finding of the Court that royalty is a tax. A statement caused by an apparent AIR 1965 SC 177: (1964) 6 SCR 666 AIR 1983 Ori 210: (1983) 55 Cut LT 364 (FB) AIR 1960 MP 129: 1960 MPLJ 39 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.24 which says (vide para 12 of SCC report) that there was no “typographical error” in India Cement23 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 Others vs. Gujarat Ambuja Cement Ltd. and Another25, a Bench of three Judges of this Court observed:-

land on which the mine is situated or the price of the privilege of winning the minerals from the land parted with by the Government in favour of the mining lessee. The cess is a levy on mineral rights with impact on the land and quantified by reference to the quantum of mineral produced. The distinction, though fine, yet exists and is perceptible. (See State of W.B. v. Kesoram Industries Ltd. 16 ).

50. On the essential charcteristics of a tax, following observations of Banumathi, J. in the concurring opinion in Jindal Stainless Limited and another vs. State of Haryana and others28 cull out the essence:-

51. It is true that as a result of order passed by this Court in Mineral Area Development Authority and Others vs. Steel Authority of India and Others29, 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 reference is still pending consideration. However, none of those issues arise in the present matter.

52. On the use of the expression “royalty” in a contract, we may note following observations in Inderjeet Singh Sial and another vs. Karam Chand Thapar and others27:-

53. We may also note the following observations from the decision of a Bench of three Judges of this Court in Union of India and others vs. Motion Picture Association and others30, 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 for this purpose. It is required to pack these films and is required to allow the exhibitors to retain these films in their possession for a certain period. The films are to be returned to the Films Division thereafter. The charge is termed in the agreement as rental for the films. It covers charges for preparing the prints of the films for distribution, and for packing them for delivery. These are clearly services rendered by the Films Division for which it is paid one per cent of the net collection as a rental. As stated earlier, the total cost of preparing prints, packing them and distributing them is much higher than the total recovery made by the Films Division by way of rental from all the exhibitors. There is a clear nexus between the services rendered and the payment to be made. The payment, therefore, is in the nature of a fee rather than a tax though there may not be an exact quid pro quo.

32. The exhibitors relied upon a number of cases which distinguish a tax from a fee. We will only refer to some of them. In the case of District Council of the Jowai Autonomous Distt. v. Dwet Singh Rymbai31 this Court held that a compulsory exaction for public purposes would amount to a tax while a payment for services rendered would amount to a fee. On the facts in that case, the Court said that there was no element of quid pro quo which will justify the imposition of royalty as a fee. In Commr., H.R.E. v. Sri Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 this Court as far back as in 1954, laid down the distinction between a tax and a fee. This Court has described a tax as a compulsory exaction for public purposes which does not require the taxpayer's consent; while fee is a charge for specific service to some, and it must have some relation to the expenses incurred for the service. In Ahmedabad Urban Development Authority v. Sharadkumar Jayantikumar Pasawalla32 this Court has said that an express authorisation for the levy of a fee is necessary. In the present case, however, the rental is charged by the Films Division by virtue of an agreement between the Films Division and the individual exhibitor. This is in consideration of the Films Division supplying films to the exhibitor, packing the film and arranging for its delivery. 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 and normally has direct relationship with the benefit or privilege conferred upon the grantee. 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. Like the case in Motion Picture Association31, the basis for such charges was directly in terms of, and under the arrangement entered into between the parties, though, not referable to any statutory instrument. 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.

55. The submission that it was compulsory exaction and thus assumed the characteristics of a tax was completely incorrect and untenable. It was a pure and simple contractual relationship between the parties and the Division Bench was right in rejecting the submissions advanced by CUMI and INDSIL.

56. Thus, all the submissions advanced on behalf of CUMI and INDSIL are rejected. The instant appeals are, therefore, dismissed without any order as to costs. ……..…………………….J. [UDAY UMESH LALIT] …..……………………….J. [VINEET SARAN] NEW DELHI; September 06, 2021.