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M/s. Indsil Hydro Power and Manganese Limited v. State of Kerala and Others

Civil Appeal · 2021 INSC 449Decided 6 Sept 2021
Civil Appeal Nos. 9845-9846 of 2016
Justice Uday Umesh Lalit · Justice Vineet Saran

Background

INDSIL and Carborundum Universal Limited (CUMI) each set up captive hydroelectric power projects in Kerala under a 1990 state policy that let private industries generate their own electricity, subject to paying "royalty" for water used, including for benefits gained from "controlled release" of water from existing government reservoirs upstream. Both companies argued this royalty was actually an unconstitutional tax that the state lacked legislative competence to impose without proper statutory backing, and the High Court's Single Judge agreed and quashed the demands. The Kerala State Electricity Board appealed, and the High Court's Division Bench reversed, upholding the charges as valid contractual payments. INDSIL and CUMI then appealed to the Supreme Court.

Decision Breakdown

The Supreme Court held that the charges were "royalty" in the nature of a contractual payment for a specific benefit (the controlled release of water that aided power generation), not a compulsory tax exaction requiring separate legislative authority. Since the companies had voluntarily entered into agreements accepting these terms in exchange for being allowed to set up their projects, they could not later resile from paying what they had contractually agreed to pay. The Court also rejected the discrimination argument that captive power plants were being treated worse than independent power producers, since the two categories served different purposes and were not similarly situated. The appeals of both INDSIL and CUMI were dismissed, upholding the High Court Division Bench's decision, with no order as to costs.

Lesson Learnt

A payment made under a voluntarily signed contract in exchange for a specific benefit is a fee/royalty, not a tax, and a party cannot invoke constitutional objections to escape obligations it freely agreed to in a contract from which it also took benefits.

Official source (sci.gov.in)View Judgment (PDF)

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