Compounding Fee Is Not In The Nature Of Tax Or Duty; Delhi High Court Holds Legal Metrology Department Liable To Refund Compounding Fee Paid By Oil Marketing Companies

The bench of Justices Yashwant Varma and Dharmesh Sharma made the observation while hearing a plea filed by oil marketing companies- the Indian Oil Corporation Ltd (IOCL), Hindustan Petroleum Corporation Ltd (HPCL), and Bharat Petroleum Corporation Ltd (BPCL). The appellant-companies had challenged the Single Judge’s order where it had refused to grant refund of the compounding fee paid by them under Section 48 of the Legal Metrology Act, 2009 for compounding the offences under the Act.

The court remarked that once the Single Judge had held that the appellant-companies had not violated any provision of the 2009 Act, the Legal Metrology Department was liable to refund the compounding fee paid by the former.

The bench said that the Department being “State”, it cannot retain monies which are otherwise not payable under the 2009 Act. It added that deposit of the compounding fee without demur or protest by the appellant-companies, could not have justified its retention.

The appellants, IOCL, HPCL, and BPCL, had imported certain fuel dispensing units for dispensing fuel at various outlets. The said units were imported without obtaining the registration under Section 19 of the Legal Metrology Act.

The Legal Metrology Department was of the view that the appellant-companies were required to get themselves registered under Section 19 of the Act. The Department thus issued letters calling upon the companies to register themselves under the Act. The Department also seized certain dispensing units (“DUs”) used by the appellants on the ground of violation of the provisions of the Act. The Department alleged that the models used by the appellants were not approved under Section 22 of the Act. Later, the appellant-companies settled the case with the Department and paid a compounding fee of Rs. 2.04 Crores in respect of its retail outlets, for compounding the offences under the Act.

IOCL, BPCL and HPCL thereafter filed a writ petition before the Delhi High Court seeking refund of the compounding fees along with interest. The appellant-companies contended that they are not ‘dealers’ or ‘manufacturers’ under the Act. They claimed that since they do not deal in DUs and the same were imported for their self-use, they cannot be compelled to seek registration as an importer under Section 19 of the Act.

On the issue whether the appellant-companies were liable to obtain registration under Section 19 of the Act, the Single Judge came to the conclusion that the companies were neither manufacturers nor dealers of weights or measure under the 2009 Act. Noting that the DUs were imported by the appellants for their own use, the Single Judge ruled that they were not obliged to register themselves under the Act before effecting import of the DUs.

However, the Single Judge held that the claim for refund of the compounding fee could not be entertained since the same had been voluntarily paid to settle the case and to compound the offence under the Act. The contention that the compounding fees was paid under coercion, was also dismissed by the Single Judge.

In the appeal filed against the Single Judge’s order where it had refused to grant refund of the compounding fee, the Division Bench observed that the liability to pay a compounding fee under Section 48 of the 2009 Act is triggered once a manufacturer, dealer, or a person is found punishable for an offence specified in the provision.

The court remarked that once the Single Judge had come to the conclusion that the appellants had not violated any provision of the 2009 Act, they cannot be held liable to pay the compounding fees. Ruling on the nature of the compounding fee, the bench said, “Regard must be had to the fact that a compounding fee is not in the nature of a tax or duty. It is essentially a deposit made by a person to avoid the rigours of coercive proceedings being initiated and to obtain closure. It also should not in all circumstances be necessarily viewed as an acceptance of guilt or an admission of violation of a statutory obligation.”

The court added: “We also deem it pertinent to observe that the respondents being “State” cannot be countenanced to retain monies which are otherwise not payable by the appellants under the provisions of the 2009 Act. When viewed in that light, it is evident that the issue of deposit without demur or protest could not have justified the retention of compounding fee.”

The court thus allowed the appeal, holding that the Department was liable to refund the compounding fee paid by IOCL, HPCL, and BPCL.

Case Title: Indian Oil Corporation Ltd vs Director of Legal Metrology & Ors.

Citation: 2023 LiveLaw (Del) 654

Counsel for the Appellants: Mr. Sacchin Puri, Sr. Adv. with Mr. Amit Meharia, Ms. Tannishtha Singh, Mr. Vijay Kumar, Mr. Kamil Khan and Ms. Shweta Arora, Advs.

Counsel for the Respondents: Ms. Nidhi Raman, CGSC with Mr. Zubin Singh, Adv. Mr. Srinivas Rao, Mr. Mithun Shashank, Adv. Mr. Sri Harsha Peechara, SC for Telangana with Mr. Rajiv Kumar, Adv. Mr. Ripu Daman Bhardwaj, CGSC for UOI.