New Delhi, September 8, 2021:While clarifying the difference between ‘royalty’ and ‘tax’, the Supreme Court has said that Kerala State Electricity Board’s royalty demand for allowing the companies to use the water released from hydel power plants to generate electricity for their own use, cannot be considered as tax.
Whatever be the nomenclature, the charges for use of controlled release of water in the present cases were for the privilege enjoyed by INDSIL(M/s Indsil Hydro Power and Manganese Limited) and CUMI(Carborundum Universal Limited), added the Court.
A Division bench of Justice Uday Umesh Lalit and Justice Vineet Saran observed that ‘Royalty’ is founded on an agreement between parties and has a connection to the benefit or privilege conferred on a grantee, whereas “Tax” is imposed under statutory authority without regard to any special benefit conferred on the taxpayer.
The background of the case was that 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. As per the agreement, the companies had to pay royalty for controlled release of water.
Now, being private companies, they were treated differently 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.
However, the dispute arose when the government issued revised guidelines exempting IPPs from paying water cess, which led to filing of petition challenging imposition of ‘royalty’, as ‘tax’.
“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”, observed the Division Bench.
The Top Court quoted the observations of Justice Banumathi made in the judgment of Jindal Stainless Limited and another vs. State of Haryana and others, wherein it was said that 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.
Another characteristic of tax which was observed by Justice Banumathi in Jindal Stainless Ltd,was that the levy of tax is for the purposes of general revenue, which when collected forms part of the public revenues of the State.
The Top Court noted that 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, which was perfectly justified.
Therefore, the Apex Court dismissed the appeal and refused to accept the submission that the charges levied by State Electricity Board were compulsory exaction, rather concluded it to be a pure and simple contractual relationship between the parties.