Supreme Court: A Division Bench of Uday U. Lalit and Vineet Saran, JJ. held that charges levied by the Kerala State Electricity Board for the use of controlled water by Captive Power Producers (“CPPs”) was perfectly justified. While upholding the Kerala High Court’s judgment which was challenged by the CPPs, the Supreme Court observed:

“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.”  

Facts and Appeal

The instant appeals were preferred by Indsil Hydro Power and Manganese Ltd. and Carborundum Universal Ltd. The business of both the appellants required continues supply of electricity. Both the appellants were Captive Power Producers. A captive power producer is the one who produces electricity for self-consumption. The appellants had set up hydro electric power projects in pursuance of the Policy framed by the Kerala Government allowing private agencies and public undertakings to set up hydel schemes for generation of electricity at their own cost. As per the Policy, matters concerning construction, operation and maintenance of the hydel scheme were to be managed as per the stipulations made by the Kerala State Electricity Board. Clause 14 of the Policy stated: “Royalty for the use of water together with the tax and duties on generation of power as fixed by Government/Board from time to time have to be paid by the agency”.

Attempts on part of the Board to charge royalty/cost component for controlled release of water from the two CPPs in terms of Clause 14 of the Policy led to disputes. Both the CPPs prosecuted separate proceedings before the High Court challenging the demand of royalty. They were granted relief by the Single Judge, but the Division Bench of the High Court reversed the orders of the Single Judge. Aggrieved, the two CPPs approached the Supreme Court.

Analysis and Observations

While dismissing the appeals, the Supreme Court rejected all the contentions advanced by the appellants. The discussion is summarised here:

Location of the projects

The Court considered whether the projects of the two CPPs are located at places where the advantage of controlled supply of water is assured and can be derived.

It was noted that hydro electric projects rely on the force of fall of water from a height to enable the turbines to generate electricity. The supply of water from a large reservoir is one way of ensuring consistent and controlled supply of water.

The Court found that the location of the two projects was such that supply of water meant for powerhouses situated at a height and with larger capacity definitely ensured consistent and controlled supply of water to the two projects located at a lower altitude. Thus, both the projects certainly derived advantage of controlled supply of water as contemplated in Clause 14 of the Policy.

Whether Clause 14 was unconscionable or manifestly arbitrary

Summarising  the judicial opinion on this point, the Court opined that it could not be said that the two CPPs were in a position with lesser bargaining power or were so vulnerable that by force of circumstances they were forced to accept such term as Clause 14. Therefore, Clause 14 of the Policy that stood incorporated in the respective agreements could not be termed unconscionable.

Further, holding that Clause 14 was not manifestly arbitrary, the Court observed that:

“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 [the two CPPs] were given permissions to set up their electricity generating units and such term was consciously accepted by them.”

Whether discriminatory treatment meted out to CPPs

Next, the Court considered that even if the relevant term in the Policy was not found to be unconscionable or arbitrary, the question still remain whether any discriminatory treatment was meted out to CPPs in the application of Clause 14 to CPPs alone and not to Independent Power Producers (IPPs).

The Court noted that qualitatively, the CPPs and IPPs have a basic distinction. CPPs produce electricity for 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 to be supplied by the Board to its consumers like electricity produced by the generating units or power houses of the Board. It was observed:

“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 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.”

Absence of jurisdiction and ancillary issues

The appellants submitted that royalty 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.

Discussing various judicial precedents on distinction of tax and fee, and connotation of the expression ‘royalty’, the Court said:

“[T]he expression ‘Royalty’ has consistently been construed to be compensation paid for rights and privileges enjoyed by the grantee and normally has its genesis in the agreement entered into between the grantor and the grantee. As against tax which is imposed under a statutory power without reference to any special benefit to be conferred on the payer of the tax, the royalty would be in terms of the agreement between the parties and normally has direct relationship with the benefit or privilege conferred upon the grantee.”

The Court concluded that whatever be the nomenclature, the charges for use of controlled release of water were for the privilege enjoyed by the two CPPs. 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.

Lastly, the Court held that the submission that it was compulsory exaction and thus assumed the characteristics of a tax, was completely incorrect and untenable. It was a pure and simple contractual relationship between the parties.


In such view of the matter, the Supreme Court held that the charge was perfectly justified. Accordingly, the appeals were dismissed. [Indsil Hydro Power & Manganese Ltd. v. State of Kerala, 2021 SCC OnLine SC 665, decided on 6-9-2021]

Tejaswi Pandit, Senior Editorial Assistant has reported this brief.

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