On today’s show, we will discuss the case of M/s. Indsil Hydro Power and Manganese Limited vs. State of Kerala and Ors., Civil Appeal Nos. 9845-9850 of 2016, wherein among other things, the Supreme Court considered whether imposition of ‘royalty’ by the Respondent State on use of water by the Appellants is justified or not.
On today’s show, we will discuss the case of M/s. Indsil Hydro Power and Manganese Limited vs. State of Kerala and Ors., Civil Appeal Nos. 9845-9850 of 2016, wherein among other things, the Supreme Court considered whether imposition of ‘royalty’ by the Respondent State on use of water by the Appellants is justified or not.
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Hi everyone.
Welcome to Legal Talks by Desi Kanoon.
I am Suyash and I am excited to have started this show.
On today’s show, we will discuss the case of M/s. Indsil Hydro Power and Manganese Limited vs. State of Kerala and Ors., Civil Appeal Nos. 9845-9850 of 2016, wherein among other things, the Supreme Court considered whether imposition of ‘royalty’ by the Respondent State on use of water by the Appellants is justified or not.
In this case, the Appellant entered into a Hydel Power Agreement with the Respondent for generation of electricity. Clause 14 of the Agreement provided for imposition of ‘royalty’ on the Appellant for the use of water along with the relevant taxes and duties. It was contended that such imposition of ‘royalty’ is unconstitutional since the Appellants are discriminated against similarly situated hydel power plants where no such royalty is imposed and that such imposition of ‘royalty’ would partake the nature and character of a ‘tax’ which is impermissible without any statutory backing. On the other hand, the Respondent State argued that imposition of ‘royalty’ is legal since it has been specifically mentioned in the Contract to which the Appellants are signatory. In order to understand the matter in a better manner, let us go through the pertinent observations by the Court.
Firstly, the Court made an endeavour to understanding the meaning of ‘royalty’ by referring to various case-laws and law lexicons. In the case of H.R.S. Murthy v. Collector of Chittoor, AIR 1965 SC 177, it was observed that “royalties are payments which the Government may demand for the appropriation of minerals, timber or other property belonging to the Government” and “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.”
Secondly, the Court also explained the meaning of ‘tax’ and relied upon the findings of the Court in the case of Jindal Stainless Limited and Another v. State of Haryana and Others, (2017) 12 SCC 1, wherein it was observed that “a tax is a compulsory exaction of money by a public authority for public purposes enforceable by law and is not payment for services rendered.”
Thirdly, the Court clarified the use of the expression ‘royalty’ in the realm of contracts and relied upon the observations made in the case of Inderjeet Singh Sial and Another v. Karam Chand Thapar and Others, (2011) 4 SCC 450, wherein it was held that when contracting parties use the word ‘royalty’ in a Contract, then mere usage of such word does not confer any sovereign rights of the state on the private party to contend that such usage of word ‘royalty’ makes redundant the rights and obligations that have been created by the Contract.
Fourthly, the Court considered the distinction between tax and fee. According to the Court, “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.”
Fifthly, the Court opined that such imposition of ‘royalty’ is basically charges for the privilege of use of controlled release of water which helps in generation of electricity by the Appellants. “For such benefit or privilege conferred upon them, the Agreements arrived at between the parties contemplated payment of charges for such conferral of advantage.” According to the Court, such charges were completely justified.
Sixthly, the Court observed that such imposition of ‘royalty’ cannot be termed as compulsory exaction as it was the result of the contractual relationship between the parties.
Therefore, in view of the afore-stated reasons, the Supreme Court rejected the submissions of the Appellants that imposition of ‘royalty’ was discriminatory and is akin to a tax.
Those were the observations by the Court. So, what are my concluding remarks?
What is and what is not royalty has been the subject-matter of countless petitions and it has been seen that the contractors after entering to the contracts take this plea that ‘royalty’ is discriminatory and is a tax. The Court rightly stated that when a contract has been entered into, both the parties are bound by its provisions. Later on, claiming that imposition of ‘royalty’ is discriminatory cannot sustain before the eyes of law. When a private entity uses the resources of the State such as water or minerals or any other commodity, then why should such commodity be given to private entities free of cost? Imposition of ‘royalty’ ensures that no unjust enrichment takes place by the private parties. If the contractual conditions are so erroneous and discriminatory, then the private parties are always free not to enter into such contracts. But after executing such contracts, the private parties cannot take the plea that the conditions are too onerous where in fact, what is being done is simply imposition of charges for usage of resources of state.
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