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Charges levied by Kerala State Electricity Board for captive power producers perfectly justified: Supreme Court

The business of both the appellants required continues supply of electricity. Both the appellants were Captive Power Producers. A captive power producer is the one who produces electricity for self-consumption.

The Supreme Court on Thursday upheld the Kerala High Court judgment, which was challenged by the Captive Power Producers, observing that charges levied by the Kerala State Electricity Board for the use of controlled water by CPPs was perfectly justified.

The Bench of Justices U.U. Lalit and Vineet Saran, while considering the appeals and discussing various judicial precedents on distinction of tax and fee, and connotation of the expression ‘royalty’  said,

“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.”

It was submitted that a decision was taken on April 8, 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, the Court reasoned.

The Court held that 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.

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The bench observed that 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.

“Whatever be the nomenclature, the charges for use of controlled release of water were for the privilege enjoyed by the two CPPs. 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,” it noted.

The facts of the case are that Indsil Hydro Power and Manganese Limited (INDSIL) and Carborundum Universal Limited (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 business of both the appellants required continues supply of electricity. Both the appellants were Captive Power Producers. A captive power producer is the one who produces electricity for self-consumption.

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.

The appellants had set up hydro electric power projects in pursuance of the Policy framed by the Kerala Government allowing private agencies and public undertakings to set up hydel schemes for generation of electricity at their own cost. As per the Policy, matters concerning construction, operation and maintenance of the hydel scheme were to be managed as per the stipulations made by the Kerala State Electricity Board.

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).

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KSEB attempts  to charge royalty/cost component for controlled release of water from the two CPPs in terms of Clause 14 of the Policy led to disputes. Both the CPPs prosecuted separate proceedings before the High Court challenging the demand of royalty. They were granted relief by the Single Judge, but the Division Bench of the High Court reversed the orders of the Single Judge. Aggrieved, the two CPPs approached the Apex Court.

Arguments raised 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.

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, V. Giri, learned Senior Advocate for INDSIL submitted.

Appearing for CUMI, C.A. Sundaram, Senior Advocate argued that here 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.

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Jaideep Gupta and P.V. Surendranath, Senior Advocates appearing for the Board and the State respectively, in both the appeals, submitted that 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 the 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.

Senior Advocates  further submitted that 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.

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, the Senior Advocates added.

The Bench of Justices U.U. Lalit and Vineet Saran, while considering the appeals and discussing various judicial precedents on distinction of tax and fee, and connotation of the expression ‘royalty’  said that,

“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.”

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, the Court reasoned.

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The Court held that 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 bench observed that 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.

In the conclusion the Court said  that whatever be the nomenclature, the charges for use of controlled release of water were for the privilege enjoyed by the two CPPs. 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.

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