The Supreme Court has explained the differences between the concepts of 'royalty' and 'tax' in a recent decision.A division bench comprising Justices UU Lalit and Vineet Saran observed that 'Royalty' has its basis in an agreement entered into between parties and has a nexus with the benefit or privilege conferred on a grantee. Tax is imposed under a statutory power without reference to...
The Supreme Court has explained the differences between the concepts of 'royalty' and 'tax' in a recent decision.
A division bench comprising Justices UU Lalit and Vineet Saran observed that 'Royalty' has its basis in an agreement entered into between parties and has a nexus with the benefit or privilege conferred on a grantee. Tax is imposed under a statutory power without reference to any special benefit conferred on the payer of the tax.
The judgment authored by Justice Lalit stated :
"...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 payerof 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".
The Court made these observations while deciding a dispute raised by two companies from Kerala against the demand of royalty made by the Kerala State Electricity Board for allowing the companies to use the water released from hydel power plants to generate electricity for their own use.
The companies had approached the Supreme Court appealing against the judgments of the Kerala High Court which rejected their claims.
One of the 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. 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.
To address this issue, the Court referred to the following precedents which discussed the difference between royalty and tax.
- Hingir-Rampur Coal Co. Ltd. and Others vs. State of Orissa and Others (1961) 2 SCR 537
- State of West Bengal vs. Kesoram Industries Limited and Ors (2004) 10 SCC 201
- State of Himachal Pradesh and Others vs. Gujarat Ambuja Cement Ltd. and Another (2005) 6 SCC 499
- Jindal Stainless Limited and another vs. State of Haryana and others (2017) 12 SCC 1
- Union of India and others vs. Motion Picture Association and others (1999) 6 SCC 150
The Court quoted from Justice Banumathi's judgment in Jindal Stainless Ltd case.
"The essential characteristics of a tax are that:
(i) it is imposed under a statutory power without the taxpayer's consent and the payment is enforced by law;
(ii) it is an imposition made for public purpose without reference to any special benefit to be conferred on the payer of the tax; and
(iii) it is part of the common burden".
There is no element of "quid pro quo" in tax.
In the light of the principles discussed in the precedents, the Court observed that the demand in the present cases 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 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.
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"
The Court also rejected another argument raised by the companies that the contractual terms were arbitrary and discriminatory.
Case Details
Title : M/s INDSIL Hydro Power and Manganese Ltd v. State of Kerala and others(C.A No.9845-9846/2016), Carborundum Universal Limited v. State of Kerala and others(C.A No.9847-9850/2020)
Appearances : Senior Advocates V Giri and C Aryama Sundaram for appellants; Senior Advocate Jaideep Gupta for KSEB; Senior Advocate P V Surendranath for State of Kerala.
Citation : LL 2021 SC 421
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