Holding

The royalty for controlled water release is a contractual fee, not a tax, and the clause is reasonable and enforceable; the distinction between CPPs and IPPs is valid, so the appeals are dismissed.

Summary

M/S. Indsil Hydro Power and Manganese Ltd (the appellant) and Carborundum Universal Ltd (CUMI) entered into agreements with the Kerala State Electricity Board (KSEB) under a 1990 Government policy that required payment of royalty for the controlled release of water used in their captive hydro‑electric projects. Both companies later sought exemption from the royalty, arguing that the clause was arbitrary, unconscionable and amounted to a tax. The High Court rejected their claims, and the Division Bench upheld the decision. The Supreme Court held that the royalty clause was a contractual fee linked to the benefit of controlled water release, not a tax, and that the distinction between captive power producers (CPPs) and independent power producers (IPPs) was reasonable to avoid burdening consumers. Consequently, the appeals were dismissed.

Issues considered

The validity and reasonableness of Clause 14 of the 1990 Government policy imposing royalty for controlled water release.
Whether the royalty constitutes a tax or a fee/royalty under constitutional law.
Whether the clause is unconscionable or arbitrary, given the bargaining positions of the parties.
The legality of differentiating between CPPs and IPPs for the levy of royalty.
The jurisdiction of the Board to levy royalty in the absence of a specific statutory provision.

Legislation cited

Subjects

royaltycontrolled release of watercaptive power producerindependent power producertax vs feecontractual clauseunconscionable contractdiscriminationelectricity generationhydel schemeKerala State Electricity Boardpolicy clause 14water usage charge

Judgment

136 [2021]REPORTS
SUPREME COURT 13 S.C.R.136 [2021] 13 S.C.R.

A M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED
v.
STATE OF KERALA AND OTHERS
(Civil Appeal Nos.9845-9846 of 2016)
B
SEPTEMBER 06, 2021
[UDAY UMESH LALIT AND VINEET SARAN, JJ.]
Electricity: Hydel schemes for generation of electricity –
Royalty for use of water – Demand of – On facts, in terms of the
C Government policy, the appellant-Captive Power Producers
established Hydro Electric Project as Captive Generation Station
for its industrial unit – Agreement between the appellant and the
State Electricity Board wherein Clause 14 provided that royalty would
be charged for controlled supply of water – Appellants paying
wheeling charges for consumption of electricity, as also charges
D
for the use of controlled supply of water at the rate specified in
Agreement – Appellant then sought exemption from payment of
charges for controlled release of water or royalty in respect of
electricity generated by it at its Hydel Project – Rejection of the
appellant’s claim by the High Court – On appeal, held: Reasonable
E charges for benefit derived by private entities justified – Since the
private entity or agency would stand to gain from and out of the
capital outlay and infrastructure put in place by the State, some
reasonable charges for such benefit would naturally be imposed –
It was only under such Policy that both the appellants were given
permissions to set up their electricity generating units and such
F
term was consciously accepted by them – Thus, the concerned Clause
in the Agreement as well as the terms of the Policy cannot be termed
unconscionable, arbitrary or unreasonable – Furthermore, the
royalty would be in terms of the agreement between the parties and
normally has direct relationship with the benefit or privilege
G conferred upon the grantee as against tax which is imposed under
a statutory power without reference to any special benefit conferred
on the payer of the tax – Whatever be the nomenclature, the charges
for use of controlled release of water were for the privilege enjoyed
by the CPPs, on basis of the arrangement between the parties.
H
136
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 137
STATE OF KERALA AND OTHERS

Dismissing the appeals, the Court A
HELD: 1.1 The location of the project of CUMI is at a place
where the discharge of water from Moozhiyar Power House of
the Board is diverted to Kakkad Power House of the Board,
which gets steady supply of water in the form of “tail race” benefit
of the Moozhiyar Power House. After generation of electricity at B
the Kakkad Power House, the water is allowed to flow back into
the river. The capacity of Kakkad Power House is 50 MW while
that of CUMI is 12 MW. The supply of water even if meant for a
powerhouse situated at a height and with larger capacity thus
definitely ensures consistent and controlled supply of water to
C
the project of CUMI located at a lower altitude. Similarly, the
water from a larger reservoir namely, Anayirankal Dam is allowed
to flow so as to reach Paniyar Power House having a capacity of
32 MW electricity. Before reaching Paniyar Power House, the
water passes through the area where the project of INDSIL is
situated, which has a capacity of 21 MW. The location of the project D
of INDSIL would thus have natural advantage of consistent and
controlled supply of water. [Para 31, 32][170-D-G]
1.2 The facts on record thus show that both the projects
have certainly derived advantage of controlled supply of water as
contemplated in Clause 14 of the Policy. How much benefit of E
controlled supply of water each of the projects has received or
will receive in future would be a matter of computation and
calculation. [Para 33][170-G-H]
1.3 The Agreements entered into by CUMI and INDSIL
show that the terms and conditions of the Policy including Clause F
14 thereof were consciously incorporated in the Agreements.
Both CUMI and INDSIL were alive to the fact that because of
peculiar location, their units would certainly have the advantage
of controlled supply of water. Thus, the absence of a specific clause,
akin to Clause 14 of CUMI Agreement, in INDSIL Agreement,
would be of no consequence. The relationship between the parties G
would be governed by Clause 14 of the Policy, as incorporated in
the respective Agreements. [Para 34][171-A-B]

H
138 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 1.4 In cases where a term of contract or agreement entered
into between the parties is completely one sided, unfair and
unreasonable, where the other party having less bargaining power
had to accept such term by force of circumstances, the relief in
terms of the decision of this Court in Central Inland Water
Transport Corporation’s case can be extended. It may be stated
B
that the Agreements were entered into after long deliberations
where both CUMI and INDSIL had the advantage of legal counsel.
It cannot be said that CUMI and INDSIL were in a position with
lesser bargaining power or were so vulnerable that by force of
circumstances they were forced to accept such term. Therefore,
C the concerned Clause 14 in CUMI Agreement as well as the terms
of the Clause 14 of the Policy that stood incorporated in the
respective Agreements, cannot be termed unconscionable and/
or manifestly arbitrary. [Para 40][173-E-G]
1.5 The Policy had made it quite clear that the benefit of
D controlled supply of water would normally be confined to the
electricity generating units or power houses in public sector. The
reason for such Policy statement would clearly be that
considerable amount of insfrastructure and development had been
and would be made by the State in erecting and maintaining dams
and reservoirs and as such the incremental advantage or benefit
E of such investment must go back to the public through units in
public sector. If the advantage was, however, allowed to be given
to a private entity or agency, the Policy contemplated impostion
of charges for the use of such controlled supply of water. There
is nothing arbitrary or unreasonable in having such term in the
F Policy. Since the private entity or agency would stand to gain
from and out of the capital outlay and infrastructure put in place
by the State, some reasonable charges for such benefit would
naturally be imposed. It was only under such Policy that both
CUMI and INDSIL were given permissions to set up their
electricity generating units and such term was consciously
G accepted by them. The submission that the relevant Clause 14 of
the Policy would be manifestly arbitrary, therefore, does not merit
acceptance. [Para 42][175-B-F]
1.6 Qualitatively, the Capive Power Producers (CPPs) and
Independent Power Producers (IPPs) have a basic distinction.
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 139
STATE OF KERALA AND OTHERS

CPPs produce electricity for self consumption. In the instant case, A
both CUMI and INDSIL generate electricity to be consumed in
their factories or industrial units. Under the terms of their
Agreements, if anything is produced in excess of their
requirements, the surplus or excess electricity would be accepted
by the Board. However, the principal purpose and end use would
B
be self consumption. As against that, IPPs produce electricity
not for self consumption but for the use of the Board. The
electricity generated by IPPs becomes part of the grid of the
Board to be supplied by the Board to its consumers like electricity
produced by the generating units or power houses of the Board.
If the charges towards controlled supply of water were to be C
imposed uniformly for CPPs and IPPs, the effect would be that
the electricity supplied through IPPs to common consumers and
general public would necessarily have an additional burden or
load towards proportionate element of water charges. In these
circumstances, if the Board decided not to apply Clause 14 of the
D
Policy in case of all IPPs, such decision would not be termed as
discriminatory. The distinction or classification brought out was
based on a clear rationale with the object of reducing the additional
burden on the consumers. Since the electricity generated by CPPs
would be self consumed, there would be no such question of putting
any ultimate or resultant burden on the common consumers. The E
basis for such distinction or classification was quite correct and
as such this question was rightly answered by the Division Bench
of the High Court against CUMI and INDSIL. Rather than being
unnatural or irrational, the classification had a clear nexus or
relationship with the object of reducing resultant burden on the
F
common consumers. This submission therefore, is, meritless and
rejected. [Para 44][176-C-H]
1.7 As rightly observed, the basis or genesis of imposition
of royalty or charges on controlled supply of water was Clause 14
of the Policy which, as agreed between the parties, stood
incorporated in the respective Agreements. The appellants G
submitted that the royality or charges for controlled supply of
water 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 and
the case of the State and the Board was that such royalty or charges H
140 SUPREME COURT REPORTS [2021] 13 S.C.R.

A had the genesis in respective contracts and as such the action on
part of the Board was fully justified. [Para 45, 46][177-B-D]
1.8 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
B 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. Whatever be the
C nomenclature, the charges for use of controlled release of water
in the instant cases were for the privilege enjoyed by INDSIL
and CUMI. 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
D upon them, the Agreements arrived at between the parties
contemplated payment of charges for such conferral of advantage.
Such charges, were perfectly justified. [Para 54][188-E-H;
189-A]
1.9 The submission that it was compulsory exaction and
E 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.[Para 55,
56][189-B-C]

F Central Inland Water Transport Corporation v. Brojo
Nath Ganguly (1986) 3 SCC 156 : [1986] 2 SCR 278;
ICOMM Tele Limited v. Punjab State Water Supply and
Sewerage Board and Anr. (2019) 4 SCC 401 : [2019] 2
SCR 984; Pioneer Urban Land and Infrastructure Ltd.
v. Govindan Raghavan (2019) 5 SCC 725 : [2019] 5
G SCR 1169; State of Maharashtra & Ors. v. Salvation
Army, Western India Territory (1975) 1 SCC 509 :
[1975] 3 SCR 475; S.K. Jain v. State of Haryana and
Another (2009) 4 SCC 357 : [2009] 2 SCR 1080; A.L.
Kalra v. Project and Equipment Corporation of India
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 141
STATE OF KERALA AND OTHERS

(1984) 3 SCC 316 : [1984] 3 SCR 646; Rajasthan State A
Industrial Development and Investment Corporation
and Another v. Diamond and Gem Development
Corporation Limited and Another (2013) 5 SCC 470 :
[2013] 4 SCR 331; Hingir-Rampur Coal Co. Ltd. and
Others v. State of Orissa and Others [1961] 2 SCR 537
B
47; State of West Bengal vs. Kesoram Industries Limited
and Ors. (2004) 10 SCC 201 : [2004] 1 SCR 564; India
Cement Limited v. State of Tamil Nadu (1990) 1 SCC 12
: [1989] 1 Suppl. SCR 692; Himachal Pradesh and
Others v. Gujarat Ambuja Cement Ltd. and Another
(2005) 6 SCC 499 : [2005] 1 Suppl. SCR 684; Jindal C
Stainless Limited and Another v. State of Haryana and
Others (2017) 12 SCC 1 : [2016] 10 SCR 1; Mineral
Area Development Authority and Others v. Steel
Authority of India and Others (2011) 4 SCC 450 : [2011]
4 SCR 19; Inderjeet Singh Sial and another v. Karam
D
Chand Thapar and Others (1995) 6 SCC 166 : [1995]
4 Suppl. SCR 53; Union of India and Others v. Motion
Picture Association and Others (1999) 6 SCC 150 :
[1999] 3 SCR 875 – referred to.
Case Law Reference
E
[1986] 2 SCR 278 referred to Para 26
[2019] 2 SCR 984 referred to Para 26
[2019] 5 SCR 1169 referred to Para 26
[1975] 3 SCR 475 referred to Para 37 F
[2009] 2 SCR 1080 referred to Para 37
[1984] 3 SCR 646 referred to Para 41
[2013] 4 SCR 331 referred to Para 43
[1961] 2 SCR 537 referred to Para 47 G
[2004] 1 SCR 564 referred to Para 48
[1989] 1 Suppl. SCR 692 referred to Para 48
[2005] 1 Suppl. SCR 684 referred to Para 49
[2016] 10 SCR 1 referred to Para 50 H
142 SUPREME COURT REPORTS [2021] 13 S.C.R.

A [2011] 4 SCR 19 referred to Para 51
[1995] 4 Suppl. SCR 53 referred to Para 51
[1999] 3 SCR 875 referred to Para 53
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 9845-
B 9846 of 2016.
From the Judgment and Order dated 03.04.2014 of the High Court
of Kerala at Ernakulam in W.A. No. 1345 of 2013 & W.A. No.18 of
2014.
With
C
Civil Appeal Nos. 9847-9850 of 2016
C.A. Sundaram, V. Giri, Joseph Kodiantara, Sr. Advs., Anand
Sukumar, Bhupesh Kr. Pathak, S. Sukumaran, Ms. Rohini Musa, Arjun
Singh, Zaffer Inayak, Ms. Meera Mathur, Amit Krishnan,
R. Gopalakrishnan, Advs. for the Appellant.
D
P.V. Surendranath, Jaideep Gupta, Sr. Advs., C. K. Sasi, Ms. Lekha
Sudhakaran, Ms. Nayantara Roy, Abdulla Naseeh V.T., P. V. Dinesh,
Ms. Sindhu T.P., Mukund P. Unny, Advs. for the Respondents.
The Judgment of the Court was delivered by
E UDAY UMESH LALIT, J.
1. Civil Appeal Nos.9845-9846 of 2016 preferred by M/s Indsil
Hydro Power and Manganese Limited (hereinafter referred to as
“INDSIL”) and Civil Appeal Nos.9847-9850 of 2016 preferred by
Carborundum Universal Limited (hereinafter referred to as “CUMI”) are
F directed against the common judgement and order dated 03.04.2014
passed by the Division Bench of the High Court1 allowing Writ Appeal
Nos.1345 and 1355 of 2013 preferred by State of Kerala against INDSIL
and CUMI respectively.
2. On 07.12.1990, the Government 2 framed a policy vide
G G.O.(MS)No.23/90/PD (the Policy, for short) allowing private agencies
and public undertakings to set up hydel schemes for generation of electricity
at their own cost. As per the Policy, the matters concerning the
construction, operation and maintenance of the hydel scheme were to be
1
The High Court of Kerala at Ernakulam.
2
H The Government of Kerala
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 143
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

managed as per the stipulations made by the Government/Board3. Clauses A
2, 14 and 15 of the Policy were as under: -
“2. Private agencies/ public undertakings shall be allowed the
setting up of sanctioned hydel schemes of the category small/
mini/ micro at their own cost, the construction, operation and
maintenance being managed by them as per the stipulations insisted B
upon by Government/ Board. (The stipulated conditions as per
Indian Electricity Act, 1910. Electricity (Supply) Act, 1948, other
related rules and orders from Central and State Governments).
14. Royalty for the use of water together with the tax and duties
on generation of power as fixed by Government/Board from time C
to time have to be paid by the agency.
Normally generation of power from schemes of the category small/
mini/micro utilizing the storage benefits of existing reservoirs and
tailrace benefit of existing power stations will not be entrusted
with private agencies. But, Government may under special D
circumstances allow such schemes to be set up by private parties.
In such cases, in order to account for the additional advantage
gained by the agency by way of getting the Controlled releases,
the agency will have to pay to Government or the Board, as the
case may be, in tariff equivalent to the cost component for the
controlled release utilized by the agency for the energy generated E
from the scheme. This will be in addition to the royalty of water if
any, to be paid. The tariff storage/controlled release as above are
to be worked out in respect of each scheme separately taking into
account the above factors.
15. For assessment of water quantity used, the application of the F
formula BH-Power in KW where Q is in NI/Sec and H is the net
head in meter for which the machines are designed by the
manufacturers, will be made use of.”
3. CUMI has three factories in State of Kerala and is in the
business of manufacturing electro minerals using electric arc furnaces, G
which process requires continuous supply of electricity. CUMI filed an
application with the State for allotment of “Maniyar Hydel Scheme” in
the River Kakkad Basin. After the Scheme was allotted vide order dated
18.01.1991, CUMI undertook to establish the Maniyar Hydro Electric
3
Kerala State Electricity Board H
144 SUPREME COURT REPORTS [2021] 13 S.C.R.

A Project with 12 MW capacity on River Kakkad, as a Captive Generating
Station for its industrial units. An Agreement was entered into between
CUMI and the Board on 18.05.1991 (CUMI Agreement for short), which
specifically referred to the Policy and stated that the terms and conditions
of the Policy “shall form part of this agreement as if incorporated herein”.
B Clauses 8 and 14 of CUMI Agreement were as under:-
“8. The energy from Maniyar Hydro Electric Project fed into the
K.S.E.B. Grid will be metered at a location as detailed above
(using meter duly calibrated by K.S.E.B.) and this quantum of
energy less twelve percent towards wheeling charges and T & D
C Lesses will be delivered free of cost to CUMI at their E.B.T.
Terminate at the point of supply in their installations. In the case
of supply or receipt made in LT Lines the allowance for lessee
and wheeling charges will be more and will be as stipulated by the
KSEB.
D In case energy in excess of the requirement of CUMI is generated
from the projects during one accounting year such excess energy
shall be fed into the KSEB grid itself at rates to mutually agreed
upon. Under no circumstances shall CUMI be entitled for the
sale or transfer of any excess energy or any energy produced
from the project to any party other than the KSEB. The accounting
E of the energy fed into the grid and supplied by KESB to CUMI or
operating their factories in Kerala at Palakkad, Koratty and
Kalamaooery will be settled on an annual basis, the year being
reckoned from lot of July to 30th June.
… … …
F
14. Royalty for the use of water together with the tax and duties
on generation of power as fixed by govt/KESB from time to time
have to be paid by CUMI, to K.S.E.B.
Maniyar Hydro Electric Projects will utilize the existing head works
G benefit of the Maniyar Irrigation Dam of P.W.D. which is fed
mainly by the controlled release of water from existing Moozhiar
Power House of KSEB. In order to account for the additional
advantage gained by way of getting such controlled released, CUMI
will have to pay to KSEB the cost components for the energy
generated from the scheme. This will be in addition to the royalty
H on water to be paid. The charges for controlled release as above
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 145
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

as well as royalty on water, will be reckoned on the quantum of A
energy generated and shall be ten percent of energy tariff rate for
E.H.T. consumer current from time to time for every unit of energy
generated and shall be paid to the K.S.E.B.”
4. By 1994 the Project was commissioned by CUMI at a cost of
Rs.22 crores and since then CUMI has been generating electricity which B
is used for self consumption in terms of CUMI Agreement.
5. INDSIL has a factory in the State for the manufacture of Ferro
Alloys and was availing supply of electric energy from the Board.
6. INDSIL having expressed interest in setting up a small hydel
scheme, due negotiations and meetings were held. In a meeting held C
with the Board on 08.04.1994, one of the decisions was :-
“i) Royalty to be charged on water – It was decided that Irrigation
Dept. will be requested not to charge the cess or royalty especially
where water is being retained in the same basin and there is no
consumptive use.” D
7. An Agreement (INDSIL Agreement, for short) was thereafter
entered into between INDSIL and the Board on 30.12.1994 for setting
up “Kuthungal Phase I and II Project” in Idukki district of the State with
21 MW installed capacity for generation of electricity. INDSIL
Agreement referred inter alia to the terms and conditions set out in the E
Policy and stated that said terms and conditions “shall form part of this
Agreement as if incorporated herein.” Clauses 10 and 19 of INDSIL
Agreement were to the following effect: -
“10. The energy from KUTHUNGAL PHASE I AND PHASE
II project fed into the KSEB grid will be metered, at a location as F
detailed above (using meter duly calibrated by KSEB) and this
quantum of energy less 12% (Twelve percent) towards wheeling
charges and T & D losses will be delivered free of cost to the
company and their associate M/s. Sun Metals & Alloys Pvt. Ltd.,
Kanjikode, Palaghat at the EHT Terminals at the point of supply in G
their installations if any, or it will be banked by the KSEB if the
company so desires. The KSEB will collect 1% (One percent) of
the energy so banked as its commission. This will be in addition to
wheeling and loss towards transmission and distribution charges.
… … … H
146 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 19. Cess/ Royalties for use of water, if decided by the Government
together with tax/ duties as fixed by the Government from time to
time shall be paid by the company to Government.”
8. Since the setting up of the project by June, 2001 at a cost of
Rs.50 crores, INDSIL has been generating electricity which is essentially
B used by it and its associates as stated in Clause 10 of INDSIL Agreement.
9. The respective projects were thus set up by CUMI and INDSIL
for Captive Power Consumption and such producers of electricity for
own consumption are called Captive Power Producers (CPP) as against
Independent Power Producers (IPP) who generate electricity not for
C self consumption but for supply in its entirety to the Board.
10. On 11.10.2002, Guidelines were issued by the Government
after noting the Policy and the recommendations of the Empowered
Committee set up vide G.O. dated 5.9.2002. These Guidelines dealt with
transmission and distribution losses in wheeling the energy to CPPs but
D did not deal with royalty for the use of water. The relevant portion of
these Guidelines was: -
“The Empowered Committee constituted as per the GO read as
3rd paper above, to oversee the implementation of the reforms of
the KSEB and to examine the details for the erection of Small
E and Mini Hydel Projects, in its meeting held on 5.9.02 and 12.09.02
considered the scope for taking small hydel projects and
recommended to Government that the small hydel projects excluding
dam toe and tail race projects should be opened up for captive
consumers and Independent Power Producers including public
sector undertakings and also made the following recommendations:-
F
1. The Public Sector undertakings and the power intensive
industries within the State may be given preference in allotment of
the small hydro projects.
2. The allowance to KSEB to compensate the T & D loss in
wheeling the energy from generating station to the consumption
G
point of Captive Power Producers (CPPs) which has been fixed
at 10% as per clause (9) of the G.O. (MS) No.23/90/PD dt.7.12.90
may continue to be allowed to KSEB.
3. Wheeling charges to KSEB which has been fixed at 2% as per
clause (9) of G.O. (MS No.23/90/PD. dt. 7.12.90 may be increased
H to 5%.”
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 147
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

11. The Guidelines were revised vide G.O. dated 16.1.2003 which A
dealt with CPPs and IPPs. As regards CPPs the revised Guidelines
stated: -
“…… As per G.O. (MS) 23/90/PD dt.7.12.1990, Government
laid down terms and conditions for allotment of small hydel projects.
Since the Government proposes to invite more private participation B
in this sector, it has become necessary to prescribe revised
guidelines for allotment. Power schemes utilizing controlled releases
form the existing reservoirs and tailrace are reserved for KSE
Board.”
Nothing was specified with regard to the royalty for the use of C
water by CPPs but while dealing with IPPs, it was stipulated: -
“…15. Water Cess: Water Cess not required since, it will reflect
on tariff and hence not investor friendly.”
12. Both CUMI and INDSIL have been paying wheeling charges
for consumption of electricity. Right from 1994 till April 2003, CUMI D
had also paid charges for the use of controlled supply of water at the
rate specified in Clause 14 of the CUMI Agreement. In May 2003,
CUMI however made a representation that it be exempted, like other
projects from payment of such charges. Attempts on part of the Board
to charge royalty/cost component for controlled release of water from E
CUMI and INDSIL in terms of clause 14 of the Policy has led to the
disputes in the instant matters which are subject matter of these appeals.
Before we set out the pleadings pertaining to such disputes, the locations
of the respective Projects and what kind of flow of water is used, must
be noted:-
F
CUMI: The water flowing down from Moozhiyar Power House
of the Board is diverted to the Kakkad Power House (50 MW) of the
Board for generation of electricity using “tail race” benefit of Moozhiyar
Power House. After power generation at the Kakkad Power House,
the water is allowed to flow back into the river and is then utilized for
irrigation and for the Maniyar Hydro Electric Project of CUMI. G

INDSIL: Anayirankal Dam, one of the largest earthen dams in
State of Kerala was built in the 1960s and soon thereafter, the Paniyar
Power House having capacity of generating 32 MW electricity was built
by the Board. Kuthungal is situated in between Anayirankal Dam (at the
H
148 SUPREME COURT REPORTS [2021] 13 S.C.R.

A higher altitude) and Paniyar Power Station of the Board (at the lower level).
Thus the water released from Anayirankal Dam for generation of
electricity at Paniyar Power Station passes through the area where the
project of INDSIL is situated.
13. CUMI filed O.P. No.6880 of 2003 praying, inter alia, that the
B Board had no authority to levy, demand or collect any charges for
controlled release of water or royalty from CUMI in respect of electricity
generated by it at its Maniyar Hydel Project. The necessary pleadings
from the writ petition were:
“2. … … The 2nd respondent Board had set up its 2nd largest
C Hydro-Electric project of Sabirigiri on River Pamba. The waters
of the said river were utilized by the 2nd respondent Board for
generating electricity at Moozhiyar Generating Station and part of
the water flowing down from Moozhiyar Generating Station after
generation of electricity was being utilized for irrigation purpose
D and rest of it is flown down to Arabian Sea. Part of the water
flowing from the Generating Station at Moozhiyar is utilized also
for generating electricity at Maniyar Hydro Electric Project which
was taken up by the petitioner as a captive generating station for
the petitioner’s industrial units at Kalamassery and Koratti to meet
part of its requirements. …… Petitioner had no option but to sign
E the agreement stipulated by the respondents and was compelled
to sign the same.
3. … … Apart from unconstitutional impost the method of
imposition and rate of royalty and alleged controlled release of
water is totally irrational, arbitrary and unfair. The royalty can
F only be based on the quantity of material or benefit consumed by
a person from the facility.
4. … … It is submitted that water required for generating electricity
at the Mooziyar Power House is a fixed quantity based on the
capacity of the turbine and whatever water is required for such
G generation has to flow down from the turbine. There is absolutely
no controlled release of such water to the petitioner’s Hydro-
Electric Project at Maniyar in Kakkad river. The water flowing
down from Moozhiyar Power House supplemented by water from
the catchman area of river banks below the Moozhiyar Power
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 149
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

Station was partly utilized for irrigation purpose and the remaining A
water flows down earlier, it was only part of such water from
Moozhiyar Power Station and from catchman areas that is utilized
for generation of electricity by the petitioner at its Maniyar Hydel
Project. However, from the year 1998 the water flowing down
from Moozhiyar Power House was diverted to the Kakkad Power
B
House of the 2nd respondent and after generation of electricity at
Kakkad Power House the water flowing down flows back to the
same river at a lower stage and utilized for irrigation and partly
for the petitioner’s Maniyar Project. It is submitted that the water
released from Moozhiyar Power House is thus diverted to Kakkad
Power House and utilized for power generation there. The alleged C
controlled release of water from Moozhiyar Power House to the
petitioner’s hydel project at Maniyar is no longer there and has
ceased to be available to the petitioner after commissioning of the
Kakkad Power Station by the 2nd respondent. It is therefore
submitted that the 2nd respondent cannot in any manner charge or
D
collect the so-called cost component for controlled release of water
from Moozhiyar Power House since there is no such release, much
less controlled release of water from Moozhiyar Power House to
the petitioner after 1998. Petitioner submits that in any event the
charge and collection of cost component from the petitioner after
1998 is totally without authority of law, arbitrary, illegal and unfair. E
5. … … There is no provision in the Electricity Supply Act
conferring any power on the 2nd respondent to impose royalty or
any charges on generating company which have the same powers,
duties and functions for the flow of water in river Pamba or its
tributaries. F
6. Petitioner submits that the respondents have granted permission
and rights to several other generating companies like the petitioner
to set up small hydel projects. Thus private industrial generating
companies like INDSIL Limited, Silcal Metallurgic Limited TECIL
Hydro Power Limited had all set up private hydro-electric stations G
in which the respondents have not subjected them to any royalty
or alleged cost component of released water form the Hydro-
electric projects upstream on the respective rivers. Petitioner
submits that the respondents have singled out the petitioner and
subjected the petitioner to discriminatory charges.”
H
150 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 14. In the counter affidavit filed on behalf of the Board, the assertions
made by CUMI in the writ petition were denied. It was submitted:
“2…… In the Ext.P1 Government Order dated 07.12.1990, it is
clearly stated in Clause 21 that before implementation of the
scheme, an agreement setting forth all the aspects in the
B Government Order and such conditions as found necessary will
be entered into between the agency on the one part and the KSE
Board/Government on the other. Hence the allegation of the
petitioner that the 2nd respondent has no authority of law or
competency to stipulate or impose any conditions or agreement is
not true. Moreover, the respondents have not compelled the
C petitioner to sign the agreement and hence the allegation in this
regard are not true and hence denied. The petitioner has applied
for the captive generation station in pursuance of the Ext.P1
Government Order dated 07.12.1990 and the Government have
granted permission strictly in accordance with stipulation in the
D above said Government Order. Having executed the agreement
and setting up the plant the petitioner cannot now turn around and
say that the conditions were thrust upon him.
3……. The KSE Board had to construct and maintain dams and
reservoir for collection of water by investing crores of rupees.
E The water stored in the dam is released periodically and controlled
release of water is effected by the Board to the petitioner licensee.
So the petitioner is getting sufficient water for generating power
regularly as per their requirement without any capital investment
for storage of water. ....... It is further stated that normally
generation of power from schemes of the category small/mini/
F micro utilizing the storage benefit of the existing reservoir and
tailrace benefit of existing power stations will not be entrusted
with private agencies. But Government under special
circumstances allowed such schemes to be set up by private
parties. In such case, in order to account for the additional
G advantage gained by the agency by way of getting the controlled
release, the agency will have to pay to government or the Board,
as the case may be, in tariff equivalent to the cost component for
energy generated from the scheme. This will be in addition to the
royalty of water if any, to be paid. The tariff storage/controlled
release as above are to be worked out in respect of each scheme
H separately taking into account the above factors.
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 151
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

5. It is submitted that from the year 1998, the water flowing down A
from Moozhiyar Power House is collected in the reservoir of
Kakkad Power House of the 2nd respondent and after generation
of electricity at Kakkad Power House the water flowing down to
the same river and to the reservoir of the petitioner’s Maniyar
Project. Thus, the water released from the Moozhiyar Power is
B
further controlled at Kakkad Power House. Maniyar Project thus
runs with the controlled release of water from the Kakkad Power
House which was commissioned after setting up of the Maniyar
Hydro Electric Project. Water utilized for generation in their project
is from absolute controlled release if it was either from Moozhiyar
Power House or later on form Kakkad Power House and hence C
the allegation that charge and collection of cost compound from
the petitioner after 1998 is totally without authority of law, arbitrary,
illegal and unfair is baseless and untenable.”
15. In its rejoinder to the aforestated counter affidavit, CUMI
submitted: D
6. … … Whatever quality of water used at the Kakkad Power
House can only flow down and cannot be prevented by the 2 nd
respondent from flowing down. There is no question of controlling
the water that has to flow down from the power house to the river.
In addition to the water flowing down that Kakkad Power Station E
large quantity of water flows into the river from the river banks
flooding the river during heavy rains and there is no control on the
flow of water to the petitioner’s Maniyar generating station, which
is about 6 kms. downstream from Kakkad generating station.”
16. On 03.07.2004 an order was issued by the Government that in F
terms of Clause 19 of INDSIL Agreement, INDSIL would be liable to
pay royalty and cost of controlled release of water. The order stated:
“The Kuthungal HEP (21 MW) is a CPP implemented by
M/s INDSIL. The project utilizes the water available from the
free catchment between Anayirankal Dam and Kuthungal weir G
as well as the controlled releases from Anayirankal Dam.
The Maniyar HEP (12 MW) the first CPP owned by
M/s. Carbourandum Universal utilizes the controlled releases from
Sabarigiri and Kakkad Hydro Electric Project of KSEB. The royalty
H
152 SUPREME COURT REPORTS [2021] 13 S.C.R.

A for this project is being charged at the rate of 10% of the energy
tariff rate for EHT Consumers and is paid to KSEB.
Government after detailed examination hereby order that the royalty
and cost of controlled release of water to the Kuthungal HEP
shall be reckoned on the quantum of energy generated and shall
B be 10% of the energy tariff rate for EHT Consumers current from
time to time for every unit of energy generated and in addition, the
Company is liable to pay 1.2 paise per unit as electricity duty for
each unit of electricity generated in accordance with the provision
of the Kerala Electricity Duty Act.
C The Chief Electrical Inspector shall collect the royalty from the
company and remit it to the State revenue.”
17. INDSIL challenged the order dated 03.07.2004 by filing Writ
Petition (C) No.22187 of 2004 in the High Court. The Writ Petition
was however withdrawn with liberty to make an appropriate
D representation to the Government. This led to some correspondence and
representations from INDSIL. The Government, however, refused to
recall its decision to recover royalty and cost of controlled release of
water, which was communicated vide order dated 23.01.2008. The action
on part of the Government was challenged by INDSIL by filing Writ
Petition (C) No.4596 of 2008 in the High Court.
E
18. With regard to the use of controlled water INDSIL submitted:-
“11. Kuthungal is situated between Anayriankal at the higher end
and Ponmudi at the lower end. Paniyar power station at Vellathooval
has a capacity to generate 30 MW of power. The said power
F station funcitons on water flowing across Paniyar river. There
are two storages maintained by the KSEB for its Paniyar Power
Station. One is at Ponmudi and other is at Anayirankal which is
situated at a height of 1850 Meters above the sea level. As
submitted above, there is a reservoir at Anayirankal where the
water is stored. Water stored in the Anayirankal reservoir is
G released by the KSEB during the peak summer months between
January and April for the generation of power at Paniyar Power
Station. This is done normally for a period of about 45 days out of
the afore mentioned three/four months from January to April such
release of water by the KSEB from Anayirankal is dictated by
H the requirement in Paniyar Power Station at Vellathooval;
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 153
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

commencement of the releases is decided by the KSEB; quantum A
of water is controlled by the KSEB and determined by the
rquirements in Paniyar Power Station. Cessation of release is also
decided by the KSEB to sit the requirement of Paniyar Power
Station. As submitted above, Kuthungal Hydro Electric Project is
situated at Kuthungal which is at a lower level than Anayirankal
B
but higher than Paniyar Power Station.
… … …
When there is a release of water from the Anayirankal Reservoir
to enable generation of power at Paniyal Hydro Electric Station
at Vellathooval, petitioner company is also enabled to utilize the C
said water for diversion into Kuthungal Hydro Electric facility for
generation of power there from. This is done only for a period of
about 45 days during the peak summer months and controlled
release of water from Anayirankal is effected by the KSEB only
in accordance with its own schedule to suit its own requirement of
generation of power at Paniyar Hydro Electric Station and such D
release of water is not simply done to suit the requirement of
petitioner or to bring about any advantage to the petitioner as such.”
Seeking to draw distinction between the project of CUMI and
that of INDSIL, it was stated:-
E
“….the agency under Exhibit-P2 agreement is dependent on the
controlled release of water from Sabarigiri and Kakkad Hydro
Electric Project. Such controlled release, quantum of release and
cessation of same are all made suited to the requirement of the
project in question. Release of water was utilized by Messrs
Carboradum Universal Limited for the purpose of generating F
power in the Maniyar Hydro Electric Project. Water released from
Sabarigiri and Kakkad Power Project are controlled releases. This
is totally unlike in the case of the petitioner where the actual
release of water from Anayrankil is in the manner mentioned
above.” G
19. The reply given on behalf of the Government to the petition by
INDSIL was:-
“9. … … In fact, the scheme envisages utilization of controlled
release from Anayirankal reservoir in addition to water from 114
sq.km., free catchment downstream of the dam as per the detailed H
154 SUPREME COURT REPORTS [2021] 13 S.C.R.

A project report prepared by KSEB in August, 1991. The petitioner
had also made their own assessment as per the techno economic
feasibility report submitted by them. As already mentioned, the
scheme envisages utilization of water from 114 sq.km. of free
catchment downstream of existing Anayirankal reservoir drained
from a catchment of 65 sq. Km for power generation as per the
B
detailed report mentioned above. The averment and allegations in
paragraphs 10 and 11 of the writ petition are not fully correct and
hence denied. The description of the project of the petitioner given
in the said paragraph explaining that is designed as a “run of the
river” scheme does not deny the fact that it is using the water
C released from Anayirankal reservoir for the months from January
to April. It is true that the release of water from Anayirankal
reservoir is mainly decided based on the generation requirements
at the Panniyar Power Station. However, this water when released
is being utilized at Kuthunnal for power generation. The entire
water after power generation flows down to Ponmudi reservoir
D
without any depletion of quantity of water which is the case in
every hydro electric project. The petitioner’s contention that the
release of water from Anayirankal reservoir is not done in order
to suit the requirement of the petitioner but in accordance with the
requirement of Panniyar Power Station is in correct. In fact, the
E petitioner Company is getting the full advantage of power
generation from the release of water from Anayirankal reservoir
in the peak summer months.
… … …
12. … … Even though the controlled release of water from
F Anayirankal reservoir is made to suit the requirement of power
generation at Panniyar, it is also utilized for power generation at
Kuthungal Hydro Electric Project. It is to be noted that the power
generation from the Kuthungal Project was comparatively high
when there is water releases from the Anayirankal reservoir, which
G would otherwise have been negligible if water from Anayirankal
reservoir is not released. During this period a total generation
was 266.69 MU and generation from controlled released is 60.12
MU, which is about 22.54% of the total generation. During the
drought year of 2002-03, 50% of the total generation from the
project was during summer months utilizing water release from
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 155
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

Anayirankal. The above facts clearly establishes that the petitioner A
is a beneficiary of the controlled release of water from
Anayirankal.”
20. Writ Petition (C) No. 4596 of 2008 preferred by INDSIL was
allowed by the Single Judge of the High Court by his judgment and order
dated 15.02.2013. It was observed that the action on the part of the B
Government was discriminatory, as all CPPs with the exception of CUMI
were not subjected to such royalty. The explanation offered that CPPs
and IPPs stood on different footings was not accepted. It was concluded
that there was no jurisdiction to recover any royalty or cess and
accordingly the order dated 03.07.2004 was quashed.
C
21. O.P. No.6880 of 2003 preferred by CUMI was allowed by
the Single Judge of the High Court by his judgment and order dated
03.04.2013 with following observations:
“Even though in W.P.(C) No.4596/2008, I have given some findings
against the petitioner, in view of my findings in Paragraphs 36 to D
41 and 51 to 53 of the said judgment, I allow this writ petition and
set aside the impugned order, Annexure P-3 holding that the
Government is devoid of jurisdiction to realize any amount from
the petitioner by way of Royalty or other charges on the water
used for the Maniyar Hydel Project. In the circumstances, there
will be no order as to costs.” E

22. The decisions of the Single Judge in the matters of INDSIL
and CUMI were called in question by the Board by filing Writ Appeal
Nos.1345 of 2013 and 1355 of 2013 respectively before the Division
Bench, which appeals were allowed by the Division Bench vide its
common judgment and order dated 03.04.2014. F
The judgment of the Division Bench comprises of two parts: the
first part dealt with the case of INDSIL; while the second part considered
the case of CUMI.
22.1 After considering some of the decisions of this Court, it was
G
held that after entering into an agreement, a party would be estopped
from disputing its liability in terms of the agreement. With regard to the
submission based on discrimination, the Division Bench observed:-
“24. The first ground on which the learned single Judge has
interfered with Ext.P11 is that it violated Article 14 of the
H
156 SUPREME COURT REPORTS [2021] 13 S.C.R.

A Constitution of India which prohibits discrimination. The judgment
shows that according to the learned single judge, the distinction
between 1st respondent’s Hydro Electric plant and others on the
basis that the former is a CPP and the latter is an IPP, is an artificial
one and has no object that is sought to be achieved by it. In our
view, this conclusion of the learned single Judge has no basis. As
B
we have already seen the Hydro Electric Project of the 1st
respondent is a Captive Power Plant, which is meant only to cater
to their own requirement of electrical energy at their factory in
Palalkkad. Therefore, generation at CPP does not involve any
sale either to the Electricity Board or to anybody else. On the
C other hand, the remaining power plants, except the one established
by M/s Carborandum Universal Limited, are Independent Power
Plants which have entered into power purchase agreements with
the KSB on the basis of which the entire power generated is
purchased by the Electricity Board on terms and conditions which
are mutually agreed between the parties. In respect of the power
D
thus generated by the IPP’s, if the Board or the State levys royalty,
cess or other charges, that will necessarily be added to the price
at which the energy generated is sold to the Board. Such increased
price paid by the Board to the generating company, necessarily
will have to be passed on to the Board’s consumers, who are the
E end users of the energy generated. This necessarily will lead to a
situation where the energy generated and sold to consumers would
become costlier. According to the Board and the Government,
this was the reason why the IPP’s were relieved of the obligation
to pay royalties or cess or other charges on the energy generated
by them.
F
25. Learned single Judge has held that both IPP and CPP are
established for the same purpose of augmenting energy generation.
But the learned single Judge has lost sight of the distinguishing
factor that the energy generated by the CPP of the 1st respondent
is not available for distribution to consumers and that it is only for
G self consumption unlike the other IPP’s. Therefore, in our view,
the justification that if royalty or cess or other charges are levied,
the energy generated at IPP’s would be more expensive to the
consumer and that it was therefore that the IPP’s were relieved
of that obligation, is a valid reason for classification of IPP’s and
H CPP’s under Article 14 of the Constitution of India.
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 157
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

26. Secondly, IPP’s that are complained of by the 1st respondent A
were established to Exts.P8 and P9 orders issued by the
Government of Kerala in 2002 and 2003. These orders show that
the terms and conditions that are incorporated in these orders are
totally different from what are contained in Ext.P1, pursuant to
which sanction was accorded, agreement was executed and the
B
project was established by the 1st respondent. Therefore, the
obligations undertaken by the 1st respondent in Ext.P3 agreement
and the obligations that are fastened on the beneficiaries of Ext.p8
and Ext.P9 are incomparable and different. That itself shows that
the 1st respondent and the owners of the independent power plants
fall in separate classes and therefore also there cannot be any C
discrimination to be complained of.
27. Yet another reason, in our view, a valid one, urged by the
Electricity Board was that unlike the case of the 1st respondent,
the 59 IPP’s are not beneficiaries of controlled release of water.
The pleading show that according to the State, 22.54% of the D
power generated by the 1st respondent at its CPP is attributable to
controlled release of water. On the other hand, IPP’s are not
beneficiaries of such controlled release. That also is a sound reason
to hold that the CPP’s and IPP’s are not similarly situate.
28. In sum and substance, we are unable to endorse the conclusion E
of the learned single Judge that by issuing Ext.P11, the 1st
respondent was treated in a discriminatory manner or the Ext.P11
is arbitrary or unreasonable offending Article 14 of the Constitution
of India.”
22.2 Considering the nature of obligation undertaken in terms of F
INDSIL Agreement, the Division Bench observed:-
“38. Since royalty in these cases is only a contractual payment
reserved by the granter and is not a levy in the nature of tax, the
question of the State being legislatively competent or incompetent
to levy royalty on the water consumed at the hydel plant of the G
first respondent does not arise. Even if the words royalty and cess
are interchangeably used, that is inconsequential, in so far as the
nature of the levy of royalty is concerned. Therefore, this
conclusion of the learned single Judge also cannot be sustained.

H
158 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 39. The learned single Judge also held that even if the levy is
payable, such levy cannot have retrospective effect. This view
also cannot be endorsed because once the 1st respondent has
undertaken the liability to pay royalty as and when levied by the
Government, Government is always at liberty to levy royalty from
the time the benefit of the agreement was derived by the 1st
B
respondent. Therefore, this contention also cannot be accepted.
40. Learned senior counsel for the 1st respondent argued that the
controlled release of water from Anayirankal Dam was made by
the Board through Panniyar river depending upon the requirements
of the Panniyar Power Project of the Board. According to him,
C this water is diverted by the weir across Panniyar river at Mukkudi
to the Kuthungal Project and made use of these only because of
the situs of the Kuthungal Project. This, according to the counsel,
is only an incidental benefit and that to make them liable for
controlled release, water should be released solely at their instance
D and for generation at their project and not otherwise. In our view,
this argument has no substance. Parties are governed by a mutually
agreed contract evidence by Ext.P3. Agreement provides that for
the additional advantage of controlled release derived by them,
the agency is liable to pay charges as provided in the agreement.
Agreement does not state that such controlled release should be
E at the instance of the 1st respondent and that it should be for their
sole benefit. Instead, if the agency is a beneficiary of the controlled
release of water, they are liable to pay for it. Admittedly, the 1st
respondent is generating energy utilizing the controlled release of
water from Anayirankal and so long as it is so, in view of Clause
F 14 of the Ext.P1, the 1st respondent cannot get itself absolved of
that liability. Therefore, this contention is only to be rejected and
we do so.”
22.3 The Division Bench thus found that the Single Judge of the
High Court had erred in allowing the Writ Petition preferred by INDSIL.
G It, however, concluded that the demand raised by the Government vide
order dated 03.07.2004 was on the quantum of energy generated rather
than being linked to the quantity of water used or the utilization of controlled
release of water. It, therefore, directed the Government to pass fresh
orders after due notice to the appellant as under:-

H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 159
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

“42. Therefore, royalty under clause 14 of Ext.P1 Government A
Order should be levied assessing the quantity of water used
applying Clause 15 of Ext.P1. However, in Ext. P11 royalty is
levied on the quantum of energy generated. This, in our view, is
inconsistent with Ext.P1 Government Order and Ext. P3
agreement which permits levy of royalty only for the use of water,
B
which also should be based on the quantity of water as assessed
by applying the formula specified in Clause 15 thereof and not on
the quantity of energy generated.
43. Similarly, for the benefit of getting the controlled release of
water, Government is free to levy on the agency, in tariff equivalent
to the cost component for energy generated from the scheme. C
For this purpose, as is evident from clause 14 of Ext.P1 Government
Order, what is payable by the 1st respondent is tariff equivalent to
the cost component for the controlled release utilized by the grantee
for the energy generated. Though at one stage, it was contended
that 35% of the energy generated was utilizing controlled release, D
in the counter affidavit filed, it is stated that it was 22.54%. While
we agree that this figure cannot be a constant one, it is a fact that
entire energy is not generated utilizing controlled release of water.
But, since the charges for controlled release as ordered in Ext.P11,
and which was confirmed by the Government in Exts.P15 and
P28, is on the entire energy generated, the demand is inconsistent E
with Exts. P1 and P3, we are unable to sustain the orders.”
22.4 With regard to the matter concerning CUMI, it was observed:
“57. In our view, the provisions of the Electricity (Supply) Act,
1948 dealt with generation of electricity and the provisions of the F
Act did not prevent a Government or Board from entering into an
agreement, agreeing to provide natural resources of water to a
generating company for the generation of energy by setting up a
hydel generation station against royalty or other charges payable
by the grantee. Therefore, if under the contract, the Government
agree to a private party like the 1st respondent that it shall make G
available water to a Hydro Electric Project for generation of energy
and in consideration, royalty is required to be paid to the Government
and that contractual right of the Government or the obligation of
the generating company to pay are not affected by any of the
provisions of the Electricity (Supply) Act, 1948. Therefore, the 1 st H
160 SUPREME COURT REPORTS [2021] 13 S.C.R.

A respondent who has willingly entered into an agreement undertaking
to pay royalty and other charges to the Government and after
having enjoyed the benefit thereof, cannot now rely on the
provisions of the Electricity (Supply) Act and contend that the
Government or the Board have no power under the Electricity
(Supply) Act to realise the charges that are contractually payable
B
by them. Therefore, this contention of the learned senior counsel
is unacceptable and is rejected.
58. The second contention raised by the learned senior counsel
for the 1st respondent was that there was no controlled release to
the Maniyar Hydro Electric Project and that therefore the charges
C levied on them for controlled release of water is unsustainable.
We have already rejected such a contention raised by the 1st
respondent in WA Nos.1345/13 and 18/14 and the reasons assigned
by us should apply to this case also. Morever, we are unable accept
this contention of the learned senior counsel for the reason that
D Clause 14 of Ext.P2 agreement provides for controlled release of
water and the 1st respondent shall pay charges to the Board. If
there was no controlled release of water, there was no reason
why the 1st respondent should have entered into such an agreement
taking over the liability to pay charges for the controlled release of
water also. That apart, both in Exts. P5 and P6, the representations
E made by them objecting to the levy, they had no case that there
was no controlled release of water. Therefore, by the above
agreement and correspondence, the first respondent themselves
have admitted that there is controlled release of water and therefore
it is too late in the day for them to turn around and contend that
F there is no controlled release of water absolving them from the
contractual obligations in Clause 14 of the agreement.”
22.5 The Writ Appeal preferred against CUMI was thus allowed
and the decision of the Single Judge was set aside.
23. INDSIL being aggrieved, filed Civil Appeals Nos.9845-9846
G of 2016 reiterating its submissions advanced in the High Court.
In the response filed on behalf of the Government, it was submitted
inter alia:-
“D. … …the Petitioner is a Captive Power Plant which generates
power from the water course along with the controlled release of
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 161
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

water from the Anayirankal reservoir to Ponmudi for self- A
consumptioin and thereby collection of royalty by Government
cannot reflect in the tariff, because the energy so generated is not
sold to KSEB for distribution. Further, 22.54% of the power
generated by the Petitioner at its Captive Power Plant is attributable
to controlled release of water. Unlike the case of the Petitioner,
B
the 59 IPP’s are not beneficiaries of such controlled release.
Royalty was demanded by Government as consideration for
granting the right to usage of water from the natural resource
vested in the Government, for generation of electricity, which does
not fall within the purview of the powers of the Regulatory
Commission constituted between the Petitioner and KSEB is C
conclusive and is absolutely binding on the Petitioner.
………
I. … … The project utilizes the water from the free catchment
between Anayirankal dam and Kuthunkal weir alongwith the
controlled release of water. The controlled release of water from D
Anayirankal dam was done by the Board through the Panniyar
River depending upon the requirements of the Panniyar Power
Project of the Board. This water, when released, is being utilized
at Kuthungal for power generation. This controlled release of water
is diverted by a weir across Panniyar River at Mukkudi to the E
Kuthungal project and used for generation of power. In the absence
of Anayirankal reservoir, the water would have flown to Ponmudi
during monsoon months and the weir would be overflowing most
of the time. And during summer months there would be substantial
shortfall in the generation of power at the Kuthungal project in the
absence of water release from Anayirankal dam. The release of F
water at Anayirankal is made in the months of January, February,
March and April every year and the scheme generates mostly
during these months in a year and primarily generates power out
of the water released from Anayirankal. The total generation of
power during this period was 266.69 MU and generation from G
controlled release was 60.12 MU, which is about 22.54% of the
total generation. The Petitioner is getting the full advantage of
power generation from the release of water from Anayirankal
reservoir in the peak summer months. In the drought year of 2002-
03, 50% of the total generation from the project was during summer
months by utilizing the water from Anayirankal dam.” H
162 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 23.1 In the affidavit in rejoinder, it was submitted by the INDSIL:-
“That Respondent no.1 & 2 have further drawn distinction on the
fact that the petitioner’s project is based on controlled release of
water from the Anayirankal dam while the other 59 projects are
not based on any controlled release. It is submitted that the
B petitioner’s project is not based on controlled release of water and
therefore there is no question of the petitioner utilizing the State’s
natural resources with controlled release of water from
Anayirankal dam for our exclusive benefits. It is submitted that
wherever the State Government has entered into a contract with
a party like M/s Carborandum’s project, involving controlled release
C of water, it has provided a specific clause to this effect since it
would involve incurring of cost for providing the services. It is
submitted that in the case of the petitioner’s, no such clause is
provided and it is for this reason that the State Government
specifically agreed in the meeting dated 8th April, 1994 that water
D cess for the use of water would not be charged. It is thus submitted
that the petitioner is being discriminated against by respondent
no.1 & 2 in the facts of the instant case in grave violation of its
fundamental rights guaranteed under Article 14 of the Constitution
of India.
E 7. it is pertinent to mention here that respondent no.1 & 2 have
imposed the same rate of royalty on Carborundum’s project and
that of the petitioner’s. It is submitted that it is an admitted fact
that Carborundum’s Project is based on controlled release. In the
Petitioner’s case, there is no such controlled release. Further, on
an average, only 22.54% of the petitioner’s generation comes from
F the alleged controlled release. It is submitted that on this ground
alone, the levy put on the petitioner is unreasonable and arbitrary.”
24. In Civil Appeal Nos.9847-9850 of 2016, the grounds of appeal
raised by CUMI have reiterated its submissions before the High Court.
The assertions with respect to the location of the project and use of
G controlled release of water were:-
“The alleged controlled release of water must be directly to the
petitioners’ Maniyar Hydroelectric project from the water releasing
point at Moozhiyar Power House of KSEB and not to Irrigation
Dam of PWD or to its own Hydroelectric project at Moozhiar.
H After the year 1998, KSEB has set up its own Hydro Electric
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 163
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

Project at Kakkad upstream of the river and two more Private A
Hydel Power Project had been approved and set up on the same
river upstream, i.e. in between the Moozhiyar Power House of
KSEB and the Petitioner’s Maniyar Power Plant. It is pertinent to
note that the alleged controlled release of water being used by the
Board’s Hydro Electric Project at Kakkad at the first instance and
B
then flows further down to two other private Hydro Electric
Projects at Ullunkal & Karikkayam before it reaches the irrigation
dam owned by PWD from where the Petitioner draws water for
its Maniyar Hydro Electric Project. It is further to be noticed that
when the flow of the controlled release of water further
strengthened by two more minor rivers and forms confluence on C
its way of flowing further down along with the other source of
water from the catchment area of 237 square kilometers as
evidence by the map on record.”
24.1 In the affidavit in reply filed by the Board, it was stated:-
“8. … …the Hydro Electric Project are generally classified into D
two categories based on the storage capacity namely (a) Hydro
projects with reservoir of large capacity and (b) Hydro projects
having small capacity reservoir /run of river projects.
… … …
E
11. The Sabarigiri Power Project comprises of two dams, one
across the river Pamba (Pamba reservoir) and the other across
its tributary Kakki (Kakki reservoir) with a flanking dam also at
Anathode. These two reservoirs are connected through a
interconnecting tunnel of 105241 feet long (3209.82m). The water
from the Kakki reservoir is drawn through 18209 ft (5553.73m) F
long power tunnel and a set of three penstocks leading the waters
to the power house with an original installed capacity of 300 MW
consisting of 6 units of 50 MW. After Renovation and Modernisation
of the station, the installed capacity is increased to 340 MW. The
total storage capacity of Kakki and Pamba reservoirs is 477.67 G
MCM (Million Cubic Metre). In addition to the above, augmentation
schemes like Upper Moozhiyar (0.035 MCM, Meenar 1 (0.028
MCM), Meenar – II (0.057 MCM) and Kullar – Gaviar (2.78
MCM) agument the Pamba and Kakki reservoirs. Thus, the total
storage capacity of Kakki and Pamba reservoirs is 480.54 MCM.
H
164 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 12. The Maniyar Power House operated by M/s Carborandum
Universal Ltd. the petitioner herein belongs to the second category
where the gross storage is only 8 MCM (Million Cubic Metre),
which is not even sufficient for two days full load operation of the
Power House. However, the Maniyar Power Station is operated
throughout the year only due to the large storage of the Pamba-
B
Kakki storage reservoir (about 60 times larger than Maniyar
storage) and controlled release of water from Sabarigiri Power
House. When M/s Carborandum Universal Ltd., executed the
agreement with KSEB on 18.05.1991, the construction of Kakkad
Power Station on the down stream of Sabarigiri Power Station
C was going on. It is to be noted that the Kakkad Power Station also
has a very small storage capacity. The Moozhiyar reservoir with
storage capacity of 1.16 MCM and Veluthodu reservoir with
storage capacity of 0.607 MCM are the reservoirs of Kakkad
Power Station. Thus, the storage capacities of the three power
stations are as shown below:
D
Sabarigiri Power House – 480.54 MCM (Effective) Kakkad
Power House – 1.767 MCM (Effective) Maniyar Power House
– 8.0 MCM (Gross)
…. …. ….
E 14. … … The Pamba Dam across Pamba river, Kakki Dam across
Kakki river and a flanking dam at Anathode are the main three
dams of Sabarigiri Project. These Dams are at an elevation of
about 900 M from the sea level. Water from the Kakki reservoir is
brought to Sabarigiri Power House, the water is again stored at
F Moozhiyar by a concrete Gravity Dam. Water from other small
streams like Saippinkuzhy stream also reaches this reservoir. This
water is brought to Kakkad Power Station through under ground
tunnel and utilized it for power generation. Water from another
stream called Veluthode is also brought to Kakkad Power Station
by constructing a small Dam across the stream. Before the
G commissioning of the Kakkad Power Station, the controlled release
of water from Sabarigiri Power House directly reached the maniyar
barrage (owned by Kerala Irrigation Department) and this was
utilized by M/s. Caborandum Universal Ltd., for power generation
at maniyar Power House. The only difference after the
H commissioning of Kakkad Power Station is that the same water
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 165
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

is once again utilized for power generation at Kakkad Power A
Station. There is an added advantage that some more control/
regulation can be done at Kakkad Power House also. It is to be
noted that there are no major sources of water (rivers) between
Kakkad and Maniyar which can substantially contribute for the
supply of water to Maniyar Power House. Now, two more small
B
power stations at Ullumkal (7MW) and karikayam (10.5 MW) are
established between Kakkad and Maniyar Power Stations. All
these power stations at Kakkad, Ullumkal, Karikayam and Maniyar
have small reservoirs and utilize the huge storage and controlled
release of water from the Sabarigiri Power Station for power
generation throughout the year. Had there been no Sabarigiri Power C
Project, the water from Pamba and Kakki rivers would have flown
though the natural flow path of these rivers and would reached
much below the Maniyar Power House as it can be seen from the
sketch attached.”
24.2 In its rejoinder to the aforestated reply, it was submitted by D
CUMI:-
“19. That the contents of para (8) of the counter affidavit need
no reply as the said contents are not relevant for the adjudication
of the instant SLP.
20. That the contents of para (9) to (18) of the counter affidavit E
are denied as wrong and baseless. It is submitted that the averments
contained in the aforesaid paragraphs are new pleas taken by
respondent no.2 for the first time before this Hon’ble Court and
as such the same cannot be allowed to be raised for the first time
at special leave petition state….” F
25. Mr. V. Giri, learned Senior Advocate for INDSIL submitted:-
a) Clause 14 of CUMI Agreement was distinct and different from
Clause 19 of INDSIL Agreement. Further, the matter was required to
be seen in the light of the decision dated 08.04.1994 and imposition of
royalty on the use of water would be in contravention of the decision G
dated 08.04.1994.
b) No explanation was forthcoming as to why, as against specific
inclusion of Clause 14 in CUMI Agreement, no such provision was made
in INDSIL Agreement.
H
166 SUPREME COURT REPORTS [2021] 13 S.C.R.

A c) Being at a lower level than the Anayirankal Reservoir but higher
than the Paniyar Power Station, the project of INDSIL was conceived
as a “run of the river scheme”. The release of water from Annayirankal
Reservoir would be only for 45 days in a year, and the regulation of
release of water would be completely at the discretion of the Board and
meant to facilitate the generation of power at the Paniyar Power Station.
B
The release of water would be determined by the requirements of the
Board at the Paniyar Power Station and that utilization of such controlled
release constituted only 22.54% of the generation by the INDSIL.
d) The controlled release of water in the case of CUMI would be
meant to suit the requirements of its project. On the other hand, such
C controlled release of water would not be exclusively for the benefit of
INDSIL but for the benefit of the Plant at Paniyar. It would therefore be
illegal to draw similarity between the case of CUMI and that of INDSIL.
e) The imposition of royalty on the use of water would be
unconstitutional as INDSIL was discriminated against other similarly
D situated hydroelectric plants.
f) Imposition of royalty in terms of Clause 19 of INDSIL
Agreement would partake the nature and character of a “Tax”. Assuming
that the royalty imposed on INDSIL had genesis in a contract, no decision
was taken by the Government as contemplated under said Clause 19.
E
g) Assuming that the terms of the Policy were incorporated into
INDSIL Agreement, the tariff for storage/controlled release was required
to be worked out in respect of each scheme separately.
26. Appearing for CUMI, Mr. C.A. Sundaram, learned Senior
F Advocate submitted:-
a) When its Agreement was entered into, CUMI was the only
Power Project in private sector and as such, there was no question of
any discrimination. However, the discrimination arose when other Power
Projects were given the benefit of controlled release of water without
any charge.
G
b) There could be no distinction between CPPs and IPPs.
Guidelines of 2002 as revised did not make any such distinction. The
basis for levy was the advantage gained from controlled release of water.
Therefore, the differentia could be between those having the benefit of
controlled release of water on one hand and those not having such
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 167
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

advantage on the other. Any other distinction such as CPPs as against A
IPPs would be unnatural and irrational.
c) Even if, the relevant Clause in the Agreement was a negotiated
Clause, said Clause being arbitrary or discriminatory was liable to be
struck down. Reliance was placed on the decision of this Court in Central
Inland Water Transport Corporation vs. Brojo Nath Ganguly 4, B
ICOMM Tele Limited v. Punjab State Water Supply and Sewerage
Board and Anr.5 and Pioneer Urban Land and Infrastructure Ltd. v.
Govindan Raghavan 6.
d) The Power Plant of CUMI had been receiving water not just
from Sabarigiri and Moozhiyar reservoirs but also from the streams in C
the catchment area. Thus, the entirety of the supply of water to CUMI
could not be treated as controlled water from Moozhiyar Power House
of the Board.
e) The relevant Clause in CUMI Agreement would, at best, attract
levy of charges for controlled release of water on the cost component D
thereof. Therefore, the stipulation in Clause 14 of CUMI Agreement
providing 10% of tariff for the electricity generated was ultra vires the
Policy.
f) Further, the levy in question had to be commensurate with the
service rendered, otherwise, it would cease to be a fee and would be E
wholly beyond the competence of the Board. Reliance was placed upon
the decision of this Court in the State of Maharashtra & Ors. vs.
Salvation Army, Western India Territory7.
g) Considering the facts of the case, the calculations were required
to be revisited where all relevant aspects had to be properly accounted F
for and the levy had to be linked to the cost of advantage gained from
controlled release of water and not from other sources from catchment
area.
27. Mr. Jaideep Gupta and Mr. P.V. Surendranath, learned Senior
Advocates appearing for the Board and the State respectively, in both
G
the appeals, submitted: -

4
(1986) 3 SCC 156.
5
(2019) 4 SCC 401.
6
(2019) 5 SCC 725.
7
(1975) 1 SCC 509. H
168 SUPREME COURT REPORTS [2021] 13 S.C.R.

A (a) Terms and conditions of the Policy including Clause 14 of the
Policy stood specifically incorporated in INDSIL and CUMI Agreements.
Said Clause 14 of the Policy dealt with the additional advantage gained
by an agency/ project by way of controlled release of water and stipulated
that the cost component for such controlled release would be required to
be paid. Clause 15 of the Policy then set out the formula to be used for
B
ascertainment of the relevant indicia. The Agreements having accepted
the liability to pay such controlled release of water, the matter was purely
in the realm of contract.
(b) There was no unequal or unnatural bargaining so as to invoke
the principles laid down in some of the decisions of this Court. Both
C CUMI and INDSIL had willingly accepted the liability to pay for the use
of controlled release of water. It was a commercial contract which was
entered into after due negotiations.
(c) The location of the projects of CUMI and INDSIL as well as
the facts on record would show that both the projects were enjoying the
D benefit of controlled supply of water. CUMI had been enjoying the benefit
of “tail race” water discharge flowing down from Moozhiyar Power
House of the Board while INDSIL Project had been enjoying the
advantage of controlled supply of water discharge from Anayirankal Dam.
(d) Clause 14 of the Policy had stipulated that normally such
E benefits of existing reservoirs and “tail race” benefit of existing power
stations would not be entrusted with private agencies but in case under
special circumstances such schemes were allowed to the private parties,
they would have to pay charges for controlled release of water.
(e) Unlike the projects which would depend upon irregular and
F intermittent supply of water, the assured and controlled supply of water
enabled smooth running of the turbines for generation of electricity. Such
assured supply was the element based on which the terms of the Policy
were incorporated in the Agreements and liability was accepted.
(f) Having agreed to abide by the terms of the Policy including
G Clause 14 of the Policy, it would not be open to CUMI and INDSIL to
submit that imposition of charges for controlled supply of water would
be discriminatory and irrational.
(g) Even if there was no specific clause in INDSIL Agreement
similar to Clause 14 in CUMI Agreement, Clause 19 of INDSIL
H Agreement read with the terms of the Policy made the situation quite
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 169
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

clear and there would be no escape from the liability to pay the charges A
for controlled release of water.
(h) There was no inter se distinction between INDSIL on one
hand and CUMI on the other. Both had been enjoying benefits of controlled
release of water and their cases came within the ambit of Clause 14 of
the Policy. B
(i) The charges payable for controlled release of water had their
genesis in the Policy and the terms of the Agreements. The submissions
on the part of CUMI and INDSIL that it would amount to compulsory
exaction was therefore without any merit.
28. Before we deal with the principal submissions, an aspect of C
the matter highlighted on behalf of the Appellants needs to be dealt with.
It was submitted that a decision was taken on 08.04.1994 that no
charges for benefit of controlled water would be imposed if the water was
being retained in the same basin. The decision in said meeting was only
to make a recommendation but the final call had to be taken by the D
Irrigation Department of the State. It cannot therefore be said that no
liability could be imposed after 08.04.1994. Pertinently, INDSIL
Agreement was entered into on 30.12.1994. Though no specific Clause
comparable to Clause 14 of CUMI Agreement was included in INDSIL
Agreement a specific reference to the terms and conditions of the policy E
was made and such terms and conditions were incorporated in INDSIL
Agreement. Thus the decision dated 08.04.1994 had no bearing on the
matter in question.
29. The first question that arises for consideration is whether the
projects of CUMI and INDSIL are located at places where the advantage F
of controlled supply of water is assured and can be derived.
30. Hydro-Electric Projects rely on the force of fall of water from
a height to enable the turbines to generate electricity. Normally, the water
is supplied through penstocks from a reservoir. The stored water from a
reservoir assures consistent and regular supply of water for the smooth
G
functioning of the generating units.
The supply of water from a large reservoir is one way of ensuring
consistent and controlled supply of water. However, because of
topography, large reservoirs are not always close to a generating unit. In
such cases, the water from a large reservoir located at a greater height
H
170 SUPREME COURT REPORTS [2021] 13 S.C.R.

A is steadily released and collected in a smaller reservoir or a weir from
which the water is thereafter supplied to the generating units; and depletion
in the stock of water is regularly replenished from the large reservoir.
This is another way of ensuring consistent and controlled supply of water
for generation of electricity.
B After the force of the water is used for propelling the turbines,
the water is discharged from the generating unit or powerhouse. Such
discharge of water or “tail race” benefit will also be consistent, depending
upon the supply of water that such generating unit or powerhouse receives.
If another generating unit is at a lower level than such powerhouse, the
discharge from the powerhouse at a higher attitude may itself assume
C and ensure consistent supply of water to the generating unit at a lower
level or altitude.
31. The location of the project of CUMI is at a place where the
discharge of water from Moozhiyar Power House of the Board is diverted
to Kakkad Power House of the Board, which gets steady supply of
D water in the form of “tail race” benefit of the Moozhiyar Power House.
After generation of electricity at the Kakkad Power House, the water is
allowed to flow back into the river. The capacity of Kakkad Power
House is 50 MW while that of CUMI is 12 MW.
The supply of water even if meant for a powerhouse situated at a
E height and with larger capacity thus definitely ensures consistent and
controlled supply of water to the project of CUMI located at a lower
altitude.
32. Similarly, the water from a larger reservoir namely, Anayirankal
Dam is allowed to flow so as to reach Paniyar Power House having a
F capacity of 32 MW electricity. Before reaching Paniyar Power House,
the water passes through the area where the project of INDSIL is
situated, which has a capacity of 21 MW. The location of the project of
INDSIL would thus have natural advantage of consistent and controlled
supply of water.
G 33. The facts on record thus show that both the projects have
certainly derived advantage of controlled supply of water as contemplated
in Clause 14 of the Policy. How much benefit of controlled supply of
water each of the projects has received or will receive in future would
be a matter of computation and calculation.
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 171
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

34. The Agreements entered into by CUMI and INDSIL show A
that the terms and conditions of the Policy including Clause 14 thereof
were consciously incorporated in the Agreements. Both CUMI and
INDSIL were alive to the fact that because of peculiar location, their
units would certainly have the advantage of controlled supply of water.
Thus, the absence of a specific clause, akin to Clause 14 of CUMI B
Agreement, in INDSIL Agreement, would be of no consequence. The
relationship between the parties would be governed by Clause 14 of the
Policy, as incorporated in the respective Agreements.
35. The next questions to be considered are whether Clause 14 of
CUMI Agreement and Clause 14 of the Policy which stood incorporated C
into the respective Agreements could be termed to be unconscionable
and/or manifestly arbitrary.
36. The decision of this Court in Central Inland Water Transport
Corporation4 which was pressed in service, was in relation to terms in a
Contract of Employment. This Court found that such term would get D
included in the contract only at the instance of the employer where
because of lack of bargaining power the employee would have no other
option but to accept such term. It was in this context that the relevant
term contained in the Contract of Employement was found to be
unconscionable. At the same time, the principles which weighed with the
Court for holding such terms unconscionable were specifically stated to E
be inapplicable in cases of commercial contracts. The relevant discussion
in paragraph 89 of the decision was:-
“89. … …The Constitution was enacted to secure to all the citizens
of this country social and economic justice. Article 14 of the
Constitution guarantees to all persons equality before the law and F
the equal protection of the laws. The principle deducible from the
above discussions on this part of the case is in consonance with
right and reason, intended to secure social and economic justice
and conforms to the mandate of the great equality clause in Article
14. This principle is that the courts will not enforce and will, when G
called upon to do so, strike down an unfair and unreasonable
contract, or an unfair and unreasonable clause in a contract,
entered into between parties who are not equal in bargaining power.
It is difficult to give an exhaustive list of all bargains of this type.
No court can visualize the different situations which can arise in
H
172 SUPREME COURT REPORTS [2021] 13 S.C.R.

A the affairs of men. One can only attempt to give some illustrations.
For instance, the above principle will apply where the inequality
of bargaining power is the result of the great disparity in the
economic strength of the contracting parties. It will apply where
the inequality is the result of circumstances, whether of the creation
of the parties or not. It will apply to situations in which the weaker
B
party is in a position in which he can obtain goods or services or
means of livelihood only upon the terms imposed by the stronger
party or go without them. It will also apply where a man has no
choice, or rather no meaningful choice, but to give his assent to a
contract or to sign on the dotted line in a prescribed or standard
C form or to accept a set of rules as part of the contract, however
unfair, unreasonable and unconscionable a clause in that contract
or form or rules may be. This principle, however, will not apply
where the bargaining power of the contracting parties is equal or
almost equal. This principle may not apply where both parties are
businessmen and the contract is a commercial transaction. In
D
today’s complex world of giant corporations with their vast
infrastructural organizations and with the State through its
instrumentalities and agencies entering into almost every branch
of industry and commerce, there can be myriad situations which
result in unfair and unreasonable bargains between parties
E possessing wholly disproportionate and unequal bargaining power.
These cases can neither be enumerated nor fully illustrated. The
court must judge each case on its own facts and circumstances.”
(Emphasis added)
37. In S.K. Jain v. State of Haryana and another8 a Bench of
F three Judges of this Court summed up as under:-
“It is to be noted that the plea relating to unequal bargaining power
was made with great emphasis based on certain observations made
by this Court in Central Inland Water Transport Corpn. Ltd. v.
Brojo Nath Ganguly4. The said decision does not in any way
G assist the appellant, because at para 89 it has been clearly stated
that the concept of unequal bargaining power has no application
in case of commercial contracts.

8
H (2009) 4 SCC 357
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 173
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

38. To similar effect, were the observations by this Court in A
ICOMM Tele Limited5, where this Court held:-
“11. As has correctly been argued by learned counsel appearing
on behalf of the respondents, this Court’s judgment in Central
Inland Water Transport Corpn.4, which lays down that contracts
of adhesion i.e. contracts in which there is unequal bargaining B
power, between private persons and the State, are liable to be set
aside on the ground that they are unconscionable, does not apply
where both parties are businessmen and the contract is a
commercial transaction (see para 89 of the said judgment). In this
view of the matter, the argument of the appellant based on this
judgment must fail.” C

39. In Pioneer Urban Land and Infrastructure Ltd6, certain
terms in the agreements entered into between the flat purchasers and
the builder were exfacie found to be one sided, unfair and unreasonable.
Relying on the decision of this Court in Central Inland Water Transport
Corporation4 , it was held that the terms of the agreements would not D
bind the flat purchasers.
40. The law is thus clear that in cases where a term of contract or
agreement entered into between the parties is completely one sided, unfair
and unreasonable, where the other party having less bargaining power
had to accept such term by force of circumstances, the relief in terms of E
the decision of this Court in Central Inland Water Transport Corporation4
can be extended. It may be stated that the Agreements were entered
into after long deliberations where both CUMI and INDSIL had the
advantage of legal counsel.
It cannot be said that CUMI and INDSIL were in a position with F
lesser bargaining power or were so vulnerable that by force of
circumstances they were forced to accept such term. Therefore, the
concerned Clause in CUMI Agreement as well as the terms of the Policy
that stood incorporated in the respective Agreements, cannot be termed
unconscionable. G
41. In ICOMM Tele Limited5, this Court found Clause 25 (viii) of
the Notice Inviting Tender to be arbitrary as said clause deterred a party
to an arbitration agreement from invoking the alternative dispute resolution
process unless it complied with requirements of pre-deposit. Though
this Court did not accept the submission, based on Central Inland Water
H
174 SUPREME COURT REPORTS [2021] 13 S.C.R.

A Transport Corporation4, that the clause in question was unconscionable,
the matter was considered from the stand point whether said clause could
be said to be manifestly arbitrary. The clause was found to be contrary
to the object of de-clogging the Court process and rendering the arbitral
process ineffective. Relying upon the decision of this Court A.L. Kalra
v. Project and Equipment Corporation of India9 it was found in
B
paragraph 23 that the clause had no nexus to the filing of frivolous claims.
The discussion in paragraph 23 was:
“23. The important principle established by this case is that unless
it is first found that the litigation that has been embarked upon is
frivolous, exemplary costs or punitive damages do not follow.
C Clearly, therefore, a “deposit-at-call” of 10 per cent of the amount
claimed, which can amount to large sums of money, is obviously
without any direct nexus to the filing of frivolous claims, as it
applies to all claims (frivolous or otherwise) made at the very
threshold. A 10 per cent deposit has to be made before any
D determination that a claim made by the party invoking arbitration
is frivolous. This is also one important aspect of the matter to be
kept in mind in deciding that such a clause would be arbitrary in
the sense of being something which would be unfair and unjust
and which no reasonable man would agree to. Indeed, a claim
may be dismissed but need not be frivolous, as is obvious from the
E fact that where three arbitrators are appointed, there have been
known to be majority and minority awards, making it clear that
there may be two possible or even plausible views which would
indicate that the claim is dismissed or allowed on merits and not
because it is frivolous. Further, even where a claim is found to be
F justified and correct, the amount that is deposited need not be
refunded to the successful claimant. Take for example a claim
based on a termination of a contract being illegal and consequent
damages thereto. If the claim succeeds and the termination is set
aside as being illegal and a damages claim of Rupees One crore
is finally granted by the learned arbitrator at only ten lakhs, only
G one-tenth of the deposit made will be liable to be returned to the
successful party. The party who has lost in the arbitration
proceedings will be entitled to forfeit nine-tenths of the deposit
made despite the fact that the aforesaid party has an award against
it. This would render the entire clause wholly arbitrary, being not
H 9
(1984) 3 SCC 316
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 175
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

only excessive or disproportionate but leading to the wholly unjust A
result of a party who has lost an arbitration being entitled to forfeit
such part of the deposit as falls proportionately short of the amount
awarded as compared to what is claimed.”
42. On the touchstone of these principles, it needs to be seen
whether Clause 14 of the Policy can be termed to be manifestly arbitrary. B
The Policy had made it quite clear that the benefit of controlled supply
of water would normally be confined to the electricity generating units
or power houses in public sector.
The reason for such Policy statement would clearly be that
considerable amount of insfrastructure and development had been and C
would be made by the State in erecting and maintaining dams and reservoirs
and as such the incremental advantage or benefit of such investment
must go back to the public through units in public sector. If the advantage
was, however, allowed to be given to a private entity or agency, the
Policy contemplated impostion of charges for the use of such controlled
supply of water. D

There is nothing arbitrary or unreasonable in having such term in
the Policy. Since the private entity or agency would stand to gain from
and out of the capital outlay and infrastructure put in place by the State,
some reasonable charges for such benefit would naturally be imposed.
It was only under such Policy that both CUMI and INDSIL were given E
permissions to set up their electricity generating units and such term was
consciously accepted by them.
The submission that the relevant Clause would be manifestly
arbitrary, therefore, does not merit acceptance.
F
43. Though we have considered the submissions that Clause 14
of the Policy would be unconscionable or arbitrary on merits, reference
may also be made to the following statement of law culled out in Rajasthan
State Industrial Development and Investment Corporation and
Another vs. Diamond and Gem Development Corporation Limited
and Another10:- G
“15. A party cannot be permitted to “blow hot-blow cold”, “fast
and loose” or “approbate and reprobate”. Where one knowingly
accepts the benefits of a contract, or conveyance, or of an order,
10
(2013) 5 SCC 470
H
176 SUPREME COURT REPORTS [2021] 13 S.C.R.

A he is estopped from denying the validity of, or the binding effect
of such contract, or conveyance, or order upon himself……”
44. Moving further, even if the relevant term in the Policy is not
found to be unconscionable or arbitrary and is found to be perfectly
justified, the question still remains whether in the application of said term
B to CPPs alone and not to IPPs, was any discriminatory treatment meted
out to CPPs.
Qualitatively, the CPPs and IPPs have a basic distinction. CPPs
produce electricity for self consumption. In the present case both CUMI
and INDSIL generate electricity to be consumed in their factories or
C industrial units. Under the terms of their Agreements, if anything is
produced in excess of their requirements, the surplus or excess electricity
would be accepted by the Board. However, the principal purpose and
end use would be self consumption. As against that, IPPs produce
electricity not for self consumption but for the use of the Board. The
electricity generated by IPPs becomes part of the grid of the Board to
D be supplied by the Board to its consumers like electricity produced by
the generating units or power houses of the Board. If the charges towards
controlled supply of water were to be imposed uniformly for CPPs and
IPPs, the effect would be that the electricity supplied through IPPs to
common consumers and general public would necessarily have an
E additional burden or load towards proportionate element of water charges.
In these circumstances, if the Board decided not to apply Clause 14 of
the Policy in case of all IPPs, such decision would not be termed as
discriminatory.
The distinction or classification brought out was based on a clear
F rationale with the object of reducing the additional burden on the
consumers. Since the electricity generated by CPPs would be self
consumed, there would be no such question of putting any ultimate or
resultant burden on the common consumers. The basis for such distinction
or classification was quite correct and as such this question was rightly
answered by the Division Bench of the High Court against CUMI and
G INDSIL. Rather than being unnatural or irrational, the classification had
a clear nexus or relationship with the object of reducing resultant burden
on the common consumers.
This submission therefore, is, meritless and rejected.

H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 177
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

45. This takes us to the last set of submissions challenging the A
imposition of royalty or charges on controlled supply of water on the
ground of absence or lack of jurisdiction and some ancilliary issues.
The matter in that behalf was considered by the Division Bench
of the High Court in paragraphs 38, 39 and 57 as quoted hereinabove.
As rightly observed, the basis or genesis of such imposition was Clause B
14 of the Policy which, as agreed between the parties, stood incorporated
in the respective Agreements.
46. The submission 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 C
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.
D
47. The distinction between tax and fee was brought out by the
Constitution Bench of this Court in Hingir-Rampur Coal Co. Ltd. and
Others vs. State of Orissa and Others11 as under:-
“The first question which falls for consideration is whether the
levy imposed by the impugned Act amounts to a fee relatable to E
Entry 23 read with Entry 66 in List II. Before we deal with this
question it is necessary to consider the difference between the
concept of tax and that of a fee. The neat and terse definition of
tax which has been given by Latham, C.J., in Matthews v. Chicory
Marketing Board12 is often cited as a classic on this subject. “A
tax”, said Latham, C.J., “is a compulsory exaction of money by F
public authority for public purposes enforceable by law, and is not
payment for services rendered”. In bringing out the essential
features of a tax this definition also assists in distinguishing a tax
from a fee. It is true that between a tax and a fee there is no
generic difference. Both are compulsory exactions of money by G
public authorities; but whereas a tax is imposed for public purposes
and is not, and need not, be supported by any consideration of
service rendered in return, a fee is levied essentially for services
11
(1961) 2 SCR 537
12
(1938) 60 C.L.R. 263, 276 H
178 SUPREME COURT REPORTS [2021] 13 S.C.R.

A rendered and as such there is an element of quid pro quo between
the person who pays the fee and the public authority which imposes
it. If specific services are rendered to a specific area or to a specific
class of persons or trade or business in any local area, and as a
condition precedent for the said services or in return for them
cess is levied against the said area or the said class of persons or
B
trade or business the cess is distinguishable from a tax and is
described as a fee. Tax recovered by public authority invariably
goes into the consolidated fund which ultimately is utilised for all
public purposes, whereas a cess levied by way of fee is not intended
to be, and does not become, a part of the consolidated fund. It is
C earmarked and set apart for the purpose of services for which it
is levied. There is, however, an element of compulsion in the
imposition of both tax and fee. When the Legislature decides to
render a specific service to any area or to any class of persons, it
is not open to the said area or to the said class of persons to plead
that they do not want the service and therefore they should be
D
exempted from the payment of the cess. Though there is an element
of quid pro quo between the tax payer and the public authority
there is no option to the tax-payer in the matter of receiving the
service determined by public authority. In regard to fees there is,
and must always be, co- relation between the fee collected and
E the service intended to be rendered. Cases may arise where under
the guise of levying a fee Legislature may attempt to impose a
tax; and in the case of such a colourable exercise of legislative
power courts would have to scrutinise the scheme of the levy
very carefully and determine whether in fact there is a co-relation
between the service and the levy, or whether the levy is either not
F
corelated with service or is levied to such an excessive extent as
to be a pretence of a fee and not a fee in reality. In other words,
whether or not a particular cess levied by a statute amounts to a
fee or tax would always be a question of fact to be determined in
the circumstances of each case. The distinction between a tax
G and a fee is, however, important, and it is recognised by the
Constitution. Several Entries in the Three Lists empower the
appropriate Legislatures to levy taxes; but apart from the power
to levy taxes thus conferred each List specifically refers to the
power to levy fees in respect of any of the matters covered in the
said List excluding of course the fees taken in any Court.
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 179
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

The question about the distinction between a tax and a fee has A
been considered by this Court in three decisions in 1954. In
Commissioner, Hindu Religious Endowments, Madras v. Sri
Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 the vires
of the Madras Hindu Religious and Charitable Endowments Act,
1951 (Madras Act 19 of 1951), came to be examined. Amongst
B
the sections challenged was Section 76(1). Under this section every
religious institution had to pay to the Government annual
contribution not exceeding 5% of its income for the services
rendered to it by the said Government; and the argument was that
the contribution thus exacted was not a fee but a tax and as such
outside the competence of the State Legislature. In dealing with C
this argument Mukherjee, J., as he then was, cited the definition
of tax given by Latham, C.J., in the case of Matthews14 and has
elaborately considered the distinction between a tax and a fee.
The learned Judge examined the scheme of the Act and observed
that “the material fact which negatives the theory of fees in the
D
present case is that the money raised by the levy of the contribution
is not earmarked or specified for defraying the expense that the
Government has to incur in performing the services. All the
collections go to the consolidated fund of the State and all the
expenses have to be met not out of those collections but out of the
general revenues by a proper method of appropriation as is done E
in the case of other Government expenses”. The learned Judge no
doubt added that the said circumstance was not conclusive and
pointed out that in fact there was a total absence of any co-relation
between the expenses incurred by the Government and the amount
raised by contribution. That is why Section 76(1) was struck down
F
as ultra vires.
The same point arose before this Court in respect of the Orissa
Hindu Religious Endowments Act, 1939, as amended by amending
Act 2 of 1952 in Mahant Sri Jagannath Ramanuj Das v. State
of Orissa15. Mukherjea, J., who again spoke for the Court, upheld
the validity of Section 49 which imposed the liability to pay the G
specified contribution on every Mutt or temple having an annual
income exceeding Rs 250 for services rendered by the State
13
(1954) S.C.R. 1005
14
(1938) 60 C.L.R. 263
15
(1954) S.C.R. 1046 H
180 SUPREME COURT REPORTS [2021] 13 S.C.R.

A Government. The scheme of the impugned Act was examined
and it was noticed that the collections made under it are not merged
in the general public revenue and are not appropriated in the manner
laid down for appropriation of expenses for other public purposes.
They go to constitute a fund which is contemplated by Section 50
of the Act, and this fund to which the Provincial Government
B
contributes both by way of loan and grant is specifically set apart
for the rendering of services involved in carrying out the provisions
of the Act. 12. The same view was taken by this Court in regard
to Section 58 of the Bombay Public Trust Act, 1950 (Act 29 of
1950) which imposed a similar contribution for a similar purpose
C in Ratilal Panachand Gandhi v. State of Bombay16. It would
thus be seen that the tests which have to be applied in determining
the character of any impugned levy have been laid down by this
Court in these three decisions; and it is in the light of these tests
that we have to consider the merits of the rival contentions raised
before us in the present petition.”
D
48. In State of West Bengal vs. Kesoram Industries Limited
and Ors.17, another Constitution Bench of this Court explained certain
observations in India Cement Limited vs. State of Tamil Nadu18, and
stated as under:-
E “59. First we will refer to certain dictionaries oft-cited in courts
of law:
Words and Phrases, Permanent Edn. (Vol. 37-A, p. 597):
“ ‘Royalty’ is the share of the produce reserved to owner for
permitting another to exploit and use property. The word
F ‘royalty’ means compensation paid to landlord by occupier of
land for species of occupation allowed by contract between
them. ‘Royalty’ is a share of the product or profit (as of a
mine, forest etc.) reserved by the owner for permitting another
to use his property.”
G Stroud’s Judicial Dictionary of Words and Phrases (6th Edn.,
2000, Vol. 3, p. 2341):

16
(1954) S.C.R. 1055
17
(2004) 10 SCC 201
18
(1990) 1 SCC 12
H
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 181
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

“The word ‘royalties’ signifies, in mining leases, that part of A
the reddendum which is variable, and depends upon the quantity
of minerals gotten or the agreed payment to a patentee on every
article made according to the patent. Rights or privileges for
which remuneration is payable in the form of a royalty.”
Words and Phrases, Legally Defined (3rd Edn., 1990, Vol. 4, p. B
112):
“A royalty, in the sense in which the word is used in connection
with mining leases, is a payment to the lessor proportionate to
the amount of the demised mineral worked within a specified
period.” C
Wharton’s Law Lexicon (14th Edn., p. 893):
“Royalty.—Payment to a patentee by agreement on every
article made according to his patent; or to an author by a
publisher on every copy of his book sold; or to the owner of
minerals for the right of working the same on every ton or D
other weight raised.”
Mozley & Whiteley’s Law Dictionary (11th Edn., 1993, p. 243):
“A pro rata payment to a grantor or lessor, on the working of
the property leased, or otherwise on the profits of the grant or
E
lease. The word is especially used in reference to mines, patents
and copyrights.”
Prem’s Judicial Dictionary (1992, Vol. 2, p. 1458):
“Royalties are payments which the Government may demand
for the appropriation of minerals, timber or other property F
belonging to the Government. Two important features of royalty
have to be noticed, they are, that the payment made for the
privilege of removing the articles is in proportion to the quantity
removed, and the basis of the payment is an agreement.”
Black’s Law Dictionary (7th Edn., p. 1330): G
“Royalty.—A share of the product or profit from real property,
reserved by the grantor of a mineral lease, in exchange for the
lessee’s right to mine or drill on the land.
Mineral royalty.—A right to a share of income from mineral
production.” H
182 SUPREME COURT REPORTS [2021] 13 S.C.R.

A 60. In D.K. Trivedi & Sons v. State of Gujarat19 a Bench of
two learned Judges of this Court dealt with “rent”, “royalty” and “dead
rent” and held as follows: (SCC pp. 53-54, paras 38-39)
“38. Rent is an integral part of the concept of a lease. It is the
consideration moving from the lessee to the lessor for demise of
B the property to him.
… … …
39. In a mining lease the consideration usually moving from the
lessee to the lessor is the rent for the area leased (often called
surface rent), dead rent and royalty. Since the mining lease confers
C upon the lessee the right not merely to enjoy the property as under
an ordinary lease but also to extract minerals from the land and to
appropriate them for his own use or benefit, in addition to the
usual rent for the area demised, the lessee is required to pay a
certain amount in respect of the minerals extracted proportionate
D to the quantity so extracted. Such payment is called ‘royalty’. It
may, however, be that the mine is not worked properly so as not to
yield enough return to the lessor in the shape of royalty. In order
to ensure for the lessor a regular income, regardless of whether
the mine is worked or not, a fixed amount is provided to be paid to
him by the lessee. This is called ‘dead rent’. ‘Dead rent’ is calculated
E on the basis of the area leased while royalty is calculated on the
quantity of minerals extracted or removed. Thus, while dead rent
is a fixed return to the lessor, royalty is a return which varies with
the quantity of minerals extracted or removed. Since dead rent
and royalty are both a return to the lessor in respect of the area
F leased, looked at from one point of view dead rent can be
described as the minimum guaranteed amount of royalty payable
to the lessor but calculated on the basis of the area leased and not
on the quantity of minerals extracted or removed.”
In H.R.S. Murthy v. Collector of Chittoor20 too the Constitution
G Bench of this Court had defined royalty to mean “the payment
made for the materials or minerals won from the land”.
61. The judicial opinion as prevailing amongst the High Courts
may be noticed. A Full Bench of the High Court of Orissa held in
19
(1986) Supp SCC 20
20
H AIR 1965 SC 177 : (1964) 6 SCR 666
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 183
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

Laxmi Narayan Agarwalla v. State of Orissa21: (AIR p. 224, A
para 12) “[R]oyalty is the payment made for the minerals
extracted. It is not tax.” In Surajdin Laxmanlal v. State of M.P.,
Nagpur22 a Division Bench of the High Court of Madhya Pradesh
referred to Wharton’s Law Lexicon and Mozley & Whiteley’s
Law Dictionary and said (at AIR p. 130, para 7) “royalties are
B
payments which the Government may demand for the appropriation
of minerals, timber or other property belonging to the Government”.
The High Court opined that there are two important features of
royalty: (i) the payment is in proportion to the quantity removed;
and (ii) the basis of the payment is an agreement.
… … … C

71. We have clearly pointed out the said error, as we are fully
convinced in that regard and feel ourselves obliged constitutionally,
legally and morally to do so, lest the said error should cause any
further harm to the trend of jurisprudential thought centring around
the meaning of “royalty”. We hold that royalty is not tax. Royalty D
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. We declare that even in India E
Cement23 it was not the finding of the Court that royalty is a tax.
A statement caused by an apparent typographical or inadvertent
error in a judgment of the Court should not be misunderstood as
declaration of such law by the Court. We also record our express
dissent with that part of the judgment in Mahalaxmi Fabric Mills
Ltd.24 which says (vide para 12 of SCC report) that there was no F
“typographical error” in India Cement 23 and that the said
conclusion that royalty is a tax logically flew from the earlier
paragraphs of the judgment.”
49. In State of Himachal Pradesh and Others vs. Gujarat
Ambuja Cement Ltd. and Another25, a Bench of three Judges of this G
Court observed:-
21
AIR 1983 Ori 210 : (1983) 55 Cut LT 364 (FB)
22
AIR 1960 MP 129 : 1960 MPLJ 39
23
(1990) 1 SCC 12
24
1995 Supp (1) SCC 642
25
(2005) 6 SCC 499 H
184 SUPREME COURT REPORTS [2021] 13 S.C.R.

A “44. “Royalty” is not a term used in legal parlance for the price
of the goods sold. It is a payment reserved by the grantor of a
patent, lease of a mine or similar right, and payable proportionately
to the use made of the right by the grantee as held in Titaghur
Paper Mills Co. Ltd. case26.
B 45. In its primary and natural sense “royalty” in the legal world, is
known as the equivalent or translation of “jura regalia” or “jura
regia”. Royal rights and prerogatives of a sovereign are covered
thereunder. In its secondary sense, the word “royalty” would signify,
as in mining leases, that part of the reddendum, variable though,
payable in cash or kind, for rights and privileges obtained. (See
C Inderjeet Singh Sial v. Karam Chand Thapar27.)
46. “Royalty” is not a tax. Simply because the royalty is levied by
reference to the quantity of the minerals produced and the impugned
cess too is quantified by taking into consideration the same quantity
of the mineral produced, the latter does not become royalty. The
D former is the rent of the land on which the mine is situated or the
price of the privilege of winning the minerals from the land parted
with by the Government in favour of the mining lessee. The cess
is a levy on mineral rights with impact on the land and quantified
by reference to the quantum of mineral produced. The distinction,
E though fine, yet exists and is perceptible. (See State of W.B. v.
Kesoram Industries Ltd.16).
50. On the essential charcteristics of a tax, following observations
of Banumathi, J. in the concurring opinion in Jindal Stainless Limited and
another vs. State of Haryana and others28 cull out the essence:-
F “334. 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.
G In Commr., Hindu Religious Endowments v. Sri Lakshmindra
Thirtha Swamiar of Sri Shirur Mutt13, the Constitution Bench
has laid down the characteristics of a tax which has since been
consistently followed and it is as under: (AIR p. 284, para 43)
26
1985 Spp SCC 280 : 1985 SCC (Tax) 538
27
(1995) 6 SCC 166
H 28
(2017) 12 SCC 1
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 185
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

“43. … “A tax” … ‘is a compulsory exaction of money by a A
public authority for public purposes enforceable by law and is
not payment “for services rendered”.’
This definition brings out, in all opinion, the essential
characteristics of a tax as distinguished from other forms of
imposition which, in a general sense, are included within it. It is B
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. The second
characteristic of tax is that it is an imposition made for public
purpose without reference to any special benefit to be conferred
on the payer of the tax. This is expressed by saying that the C
levy of tax is for the purposes of general revenue, which when
collected forms part of the public revenues of the State. As
the object of a tax is, not to confer any special benefit upon
any particular individual there is as it is said, no element of
“quid pro quo” between the taxpayer and the public authority.… D
Another feature of taxation is that as it is a part of the common
burden, the quantum of imposition upon the taxpayer depends
generally upon his capacity to pay.”
51. It is true that as a result of order passed by this Court in
Mineral Area Development Authority and Others vs. Steel Authority of E
India and Others29, certain questions concerning “royalty” as determined
under the provisions of Mines and Minerals (Development and Regulation)
Act, 1957 now stand referred to a Bench of nine Judges, which reference
is still pending consideration. However, none of those issues arise in the
present matter.
F
52. On the use of the expression “royalty” in a contract, we may
note following observations in Inderjeet Singh Sial and another vs.
Karam Chand Thapar and others27:-
“12. … … The word ‘royalty’ thus, in the deed was used in a
loose sense so as to convey liability to make periodic payments to G
the assignor for the period during which the lease would subsist;
payments dependent on the coal gotten and extracted in quantities
or on despatch. We have therefore to construe document Ex. D-5
on its own terms and not barely on the label or description given to
29
(2011) 4 SCC 450 H
186 SUPREME COURT REPORTS [2021] 13 S.C.R.

A the stipulated payments. Conceivably this arrangement could well
have been given a shape by using another word. The word ‘royalty’
was perhaps more handy for the authors to be employed for an
arrangement like this, so as to ensure periodic payments. In no
event could the parties be put to blame for using the word ‘royalty’
as if arrogating to themselves the royal or sovereign right of the
B
State and then make redundant the rights and obligations created
by the deed.
13. The commodity goes by its value; not by the wrapper in which
it is packed. A man is known for his worth; not for the clothes he
wears. Royal robes worn by a beggar would not make him a king.
C The document is weighed by its content, not the title. One needs
to go to the value, not the glitter. All the same, we do not wish to
minimise the importance of the right words to be used in documents.
What we mean to express is that if the thought is clear, its translation
in words, spoken or written, may, more often than not, tend to be
D faulty. More so in a language which is not the mother tongue.
Those faulted words cannot bounce back to alter the thought.
Thus in sum and substance when the contracting parties and the
draftsman are assumed to have known that the word ‘royalty’ is
meant to be employed to secure for the State something out of
what the State conveys, their employment of that word for private
E ensuring was not intended to confer on the assignor the status of
the sovereign or the State, and on that basis have the document
voided. … … “.
53. We may also note the following observations from the decision
of a Bench of three Judges of this Court in Union of India and others
F vs. Motion Picture Association and others30, where the payment of
fee was under the terms of a contract between the parties.
“31. The exhibitors also contend that the charge of one per cent
on the net recoveries is a compulsory exaction in the form of a
tax. Neither the Act nor the provisions of the licence stipulate
G payment of any such tax. Hence imposition of this amount is in
violation of Article 265 of the Constitution. It is true that neither
the relevant Act nor the notification nor the rules nor the terms
and conditions of the licence stipulate the payment of any rental.

30
H (1999) 6 SCC 150
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 187
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

This amount is required to be paid under an agreement which the A
exhibitors individually enter into with the Films Division for the
supply of these films. It is a payment under the terms of a contract
between the two parties. It cannot, therefore, be viewed as a tax
at all. The exhibitors contend that because they are required to
enter into these agreements, any payment under the agreement is
B
a compulsory exaction and is, therefore, tax. We do not agree.
Under the terms of the agreement, the Films Division has to supply
certain prints to the theatre owners at stated intervals. The Films
Division is required to maintain a distribution network for this
purpose. It is required to pack these films and is required to allow
the exhibitors to retain these films in their possession for a certain C
period. The films are to be returned to the Films Division thereafter.
The charge is termed in the agreement as rental for the films. It
covers charges for preparing the prints of the films for distribution,
and for packing them for delivery. These are clearly services
rendered by the Films Division for which it is paid one per cent of
D
the net collection as a rental. As stated earlier, the total cost of
preparing prints, packing them and distributing them is much higher
than the total recovery made by the Films Division by way of
rental from all the exhibitors. There is a clear nexus between the
services rendered and the payment to be made. The payment,
therefore, is in the nature of a fee rather than a tax though there E
may not be an exact quid pro quo.
Nevertheless the element of quid pro quo is very much present.
32. The exhibitors relied upon a number of cases which distinguish
a tax from a fee. We will only refer to some of them. In the case
of District Council of the Jowai Autonomous Distt. v. Dwet F
Singh Rymbai31 this Court held that a compulsory exaction for
public purposes would amount to a tax while a payment for services
rendered would amount to a fee. On the facts in that case, the
Court said that there was no element of quid pro quo which will
justify the imposition of royalty as a fee. In Commr., H.R.E. v. Sri G
Lakshmindra Thirtha Swamiar of Sri Shirur Mutt13 this Court
as far back as in 1954, laid down the distinction between a tax
and a fee. This Court has described a tax as a compulsory exaction
for public purposes which does not require the taxpayer’s consent;
31
(1984) 4 SCC 38 H
188 SUPREME COURT REPORTS [2021] 13 S.C.R.

A while fee is a charge for specific service to some, and it must
have some relation to the expenses incurred for the service. In
Ahmedabad Urban Development Authority v. Sharadkumar
Jayantikumar Pasawalla 32 this Court has said that an express
authorisation for the levy of a fee is necessary. In the present
case, however, the rental is charged by the Films Division by virtue
B
of an agreement between the Films Division and the individual
exhibitor. This is in consideration of the Films Division supplying
films to the exhibitor, packing the film and arranging for its delivery.
This is clearly an agreed fee charged for rendering services. It
cannot be viewed as a compulsory exaction or as a tax. There is
C a statutory obligation which is cast on the exhibitors to exhibit
certain films. To carry out this statutory obligation, if the exhibitors
enter into an agreement with the Films Division and agree to pay
a certain amount of rental for procuring the films from the Films
Division to comply with the statutory obligation, the levy must,
since it is correlated with the Films Division discharging certain
D
obligations under the contract, be viewed, at the highest, as a fee
and not as a tax. It is an agreed payment, and is not unreasonable.
The High Court has rightly negatived the contention of the
respondent exhibitors.”
54. Thus, the expression ‘Royalty’ has consistently been construed
E 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
F the parties and normally has direct relationship with the benefit or privilege
conferred upon the grantee.
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,
G 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
32
H (1992) 3 SCC 285 : AIR 1992 SC 2038
M/S. INDSIL HYDRO POWER AND MANGANESE LIMITED v. 189
STATE OF KERALA AND OTHERS [UDAY UMESH LALIT, J.]

them, the Agreements arrived at between the parties contemplated A
payment of charges for such conferral of advantage. Such charges, in
our view, were perfectly justified.
55. 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 B
parties and the Division Bench was right in rejecting the submissions
advanced by CUMI and INDSIL.
56. Thus, all the submissions advanced on behalf of CUMI and
INDSIL are rejected. The instant appeals are, therefore, dismissed without
any order as to costs. C

Nidhi Jain Appeals dismissed.

D

E

F

G

H