INTRODUCTION
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.
BACKDROP
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.
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 royalty. 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.
HELD BY THE COURT
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?
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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