Supreme Court clarifies electricity duty on sale to licensee: Magadh Sugar & Energy Ltd. vs. State of Bihar (24 September 2021)

Introduction

Date of the Judgment: 24 September 2021

Citation: 2021 INSC 640

Judges: Dr Dhananjaya Y Chandrachud, J, Vikram Nath, J, and BV Nagarathna, J.

Can a state government impose electricity duty on a sugar mill that sells excess power to the state electricity board? The Supreme Court recently addressed this question, focusing on whether such a sale qualifies for taxation under the Bihar Electricity Duty Act, 1948. The core issue revolves around interpreting the terms “consumer” and “licensee” within the Act, and whether a sale to a licensee, rather than a direct consumer, attracts electricity duty. This judgment examines the legislative competence of the state to impose such a tax. The judgment was authored by Dr. Dhananjaya Y Chandrachud, J, on behalf of the three-judge bench.

Case Background

M/s Magadh Sugar & Energy Ltd., the appellant, operates a sugar mill in Narkatiaganj, Bihar. The mill generates electricity using sugarcane waste (bagasse). A portion of this electricity is used for the mill’s operations, and the surplus is sold to the Bihar State Electricity Board (BSEB) since 6 March 2008. The State of Bihar, the first respondent, has been levying electricity duty on this sale of electricity. The appellant challenged these levies, arguing that they are not applicable under the Bihar Electricity Duty Act, 1948.

Timeline

Legal Framework

The core of this case revolves around the interpretation of the Bihar Electricity Duty Act, 1948. Key provisions include:

• Section 3(1) of the Bihar Electricity Duty Act, 1948: This section empowers the State Government to levy duty on the units or value of energy consumed or sold, excluding transmission and transformation losses. It states:
  
  “Subject to the provisions of sub-section (2), there shall be levied and paid to the State Government, either on the units or on the value of energy consumed or sold, excluding losses of energy in transmission and transformation, a duty at the rate or rates to be specified by the State Government in a notification.”
• Section 2(ee) of the Bihar Electricity Duty Act, 1948: This section defines the term ‘value of energy’.
  
  “(ee) ‘value of energy’ – (i) in case of energy sold to a consumer by a licensee or by any person who generates energy, means the charges payable by the consumer, to the licensee or to any person who generates such energy, for the energy supplied by such licensee or person, as the case may be; but it shall not include the following charges, namely — 1) Meter charges (2) Interest on delayed payment (3) Fuse -off call charges and reconnection charges: Provided that where no energy has been consumed by a consumer, minimum charges payable by him shall not deemed to be the value of energy: Provided further that where the units of energy actually consumed by a consumer are less than the units of energy for which prescribed minimum charges are payable, the value of energy shall, in the case of such consumer, mean the charges for the units of energy actually consumed by him and not the prescribed minimum charges: (ii) in case of energy consumed by the person generating such energy, means the charges payable by any other consumer for such quantum of power to the Bihar State Electricity Board constituted under section 5 of the Electricity (Supply) Act, 1948 (Act 54 of 1948) in respect of energy supplied by the Bihar State Electricity Board within the area where the consumer is located;”
• Section 2(b) of the Bihar Electricity Duty Act, 1948: Defines ‘consumer’ as any person who is supplied with energy but excludes a licensee or a distributing licensee.
  
  “’consumer’ means any person who is supplied with energy but does not include either a licensee or the ‘distributing licensee’ as described in clause 1 (a) of clause IX of the Schedule to the [3] Indian Electricity Act, 1910 (9 of 1910), or a person who obtained sanction under section 28 of the said Act.”
• Section 2(d) of the Bihar Electricity Duty Act, 1948: Defines ‘licensee’ to include the Bihar Electricity Board.
• Notification dated 21 October 2002: Stipulated that the rate of duty applicable on the consumption or sale of electricity would be fixed at six per cent of the value of energy consumed or sold for any other purposes other than irrigation.
• Notification dated 4 March 2005: Provided that the rate of duty to be levied on consumption of electrical energy generated by captive power plants would be six per cent of the value of energy, which shall be equivalent to the energy tariff as fixed by the BSEB.
• Notification dated 14 January 2011: Granted a blanket exemption from payment of electricity duty on electricity generated by captive plants for self-consumption.

Arguments

Appellant’s Arguments:

• The appellant argued that the sale of electricity by a generator to a licensee is not taxable under Section 3 of the Bihar Electricity Duty Act, 1948.
  • Section 3 levies tax on the value of energy consumed or sold.
  • Section 2(ee) defines ‘value of energy’ as the charge payable by a consumer to a licensee or generator.
  • Section 2(d) defines ‘licensee’ to include BSEB.
  • Since BSEB is a licensee and not a consumer, the sale to BSEB is not covered under ‘value of energy’.
• BSEB pays electricity duty on the electricity it sells to consumers, including the electricity supplied by the appellant, leading to double taxation.
• The appellant is not liable to file returns under Sections 6B(1) and 5A of the Act since it is not liable to pay the tax.
• Even if the State has the power to levy tax, it has not specified the rate of charge for sale to a licensee. The notification of 21 October 2002 only specifies the rate of duty on ‘consumption or sale of electricity’ to consumers.
• The issue is jurisdictional, and therefore the rule of alternate remedy does not apply.
• Relying on the decision of the Constitution Bench in State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203], the appellant contended that Entry 53 of List II of the Seventh Schedule must be read as ‘taxes on consumption or sale for consumption of electricity’. Since the appellant does not sell electricity to BSEB for consumption, it cannot be taxed.
• The facts of the decision in NTPC and the facts giving rise to the writ petition filed by the appellant before the High Court were substantially similar. The High Court erroneously de- tagged the writ petitions and then dismissed the appellant’s writ petition while entertaining the writ petition filed by NTPC.

Respondent’s Arguments:

• Section 3 of the Bihar Electricity Duty Act, 1948, has two parts: (i) tax on the ‘value of energy’ consumed and (ii) tax on the ‘units’ of energy sold. While the sale to a licensee is not covered by the first part, it is covered by the second part.
• Section 3(2)(c) provides that no duty is leviable on energy consumed by the licensee, and Section 4 requires every licensee to pay duty on the units of energy consumed or sold. Section 4A provides that duty shall be leviable at each point in a series of sales of energy. If Section 3 is read restrictively, it would render these sections redundant.
• Section 4A(2) provides for adjustment of duty paid at each preceding stage, thus there is no double taxation.
• The Patna High Court in the judgment rendered in NTPC interpreted Section 3 only with reference to the definition clauses and the statute was not read as a whole.
• The Constitution Bench in State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203], read Entry 53 of List II to include ‘Tax on sale’ to mean ‘Tax on sale for consumption’ because electricity cannot be stored. This should be construed to include the sale by the generator to a licensee for eventual consumption.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the sale of electricity by a generator to a licensee is taxable under Section 3 of the Bihar Electricity Duty Act, 1948.
2. Whether the State Government has the legislative competence to levy duty on the sale of electricity to an intermediary distributor, in view of the decision in State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203].
3. Whether the appellant is liable to file returns under Sections 6B(1) and 5A of the Act.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Cases:

• State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203] (Supreme Court of India): This case was cited by the appellant to argue that Entry 53 of List II of the Seventh Schedule must be read as ‘taxes on consumption or sale for consumption of electricity’. The Court held that the meaning of ‘sale’ and ‘consumption’ would be the same since electricity can neither be preserved nor stored.
• Raza Textiles Ltd. v. ITO [(1973) 1 SCC 633] (Supreme Court of India): Cited by the appellant to argue that the rule of alternate remedy does not apply when power is exercised without jurisdiction.
• State Trade Corporation of India Ltd. v. State of Mysore [AIR 1963 SC 548] (Supreme Court of India): Cited by the appellant to argue that the rule of alternate remedy does not apply when power is exercised without jurisdiction.
• Radha Kishan Industries v. State of Himachal Pradesh [2021 SCC OnLine SC 334] (Supreme Court of India): Cited by the appellant to argue that the rule of alternate remedy does not apply when power is exercised without jurisdiction.
• Whirpool Corporation v. Registrar of Trademarks, Mumbai [(1998) 8 SCC 1] (Supreme Court of India): Cited by the court to explain the exceptions to the rule of alternate remedy.
• Harbanslal Sahni v. Indian Oil Corporation Ltd [(2003) 2 SCC 107] (Supreme Court of India): Cited by the court to explain the exceptions to the rule of alternate remedy.
• Assistant Commissioner of State Tax v. M/s Commercial Steel Limited [Civil Appeal No. 5121 of 2021] (Supreme Court of India): Cited by the court to reiterate the principle of alternate remedies and its exceptions.
• State of HP v. Gujarat Ambuja Cement Ltd [(2005) 6 SCC 499] (Supreme Court of India): Cited by the court to state that a writ petition is maintainable if the taxing authorities have acted beyond their jurisdiction.
• Executive Engineer v. Seetaram Rice Mill [(2012) 2 SCC 108] (Supreme Court of India): Cited by the court to state that the High Court can interfere if the authorities have acted beyond the provisions of the Act.
• Union of India v State of Haryana [(2000) 10 SCC 482] (Supreme Court of India): Cited by the court to state that the matter should be remanded back to the High Court if it involves a question of law.
• Sree Meenakshi Mills Ltd. v Commissioner of Income Tax [AIR 1957 SC 49] (Supreme Court of India): Cited by the court to explain the tests for the identification of questions of fact, questions of law and mixed questions of law and facts.

Legal Provisions:

• Section 3(1) of the Bihar Electricity Duty Act, 1948: The charging provision which allows the State Government to levy duty on the units or value of energy consumed or sold.
• Section 2(ee) of the Bihar Electricity Duty Act, 1948: Defines ‘value of energy’.
• Section 2(b) of the Bihar Electricity Duty Act, 1948: Defines ‘consumer’.
• Section 2(d) of the Bihar Electricity Duty Act, 1948: Defines ‘licensee’.
• Section 6B(1) of the Bihar Electricity Duty Act, 1948: Pertains to the filing of returns.
• Section 5A of the Bihar Electricity Duty Act, 1948: Pertains to the filing of returns.
• Entry 53 of List II of the Seventh Schedule of the Constitution: Deals with taxes on consumption or sale of electricity.

Judgment

How each authority was viewed by the Court:

• State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203]*: The Court acknowledged the appellant’s reliance on this case, which held that Entry 53 of List II should be read as ‘taxes on consumption or sale for consumption of electricity’. However, the court did not give a finding on this point and left the matter open for fresh evaluation by the High Court.
• Raza Textiles Ltd. v. ITO [(1973) 1 SCC 633]*: The Court acknowledged the appellant’s reliance on this case, which held that the rule of alternate remedy does not apply when power is exercised without jurisdiction. The Court agreed with the principle that the High Court can exercise its writ jurisdiction if the order of the authority is challenged for want of authority and jurisdiction, which is a pure question of law.
• State Trade Corporation of India Ltd. v. State of Mysore [AIR 1963 SC 548]*: The Court acknowledged the appellant’s reliance on this case, which held that the rule of alternate remedy does not apply when power is exercised without jurisdiction. The Court agreed with the principle that the High Court can exercise its writ jurisdiction if the order of the authority is challenged for want of authority and jurisdiction, which is a pure question of law.
• Radha Kishan Industries v. State of Himachal Pradesh [2021 SCC OnLine SC 334]*: The Court acknowledged the appellant’s reliance on this case, which held that the rule of alternate remedy does not apply when power is exercised without jurisdiction. The Court agreed with the principle that the High Court can exercise its writ jurisdiction if the order of the authority is challenged for want of authority and jurisdiction, which is a pure question of law.
• Whirpool Corporation v. Registrar of Trademarks, Mumbai [(1998) 8 SCC 1]*: The Court relied on this case to explain the exceptions to the rule of alternate remedy.
• Harbanslal Sahni v. Indian Oil Corporation Ltd [(2003) 2 SCC 107]*: The Courtrelied on this case to explain the exceptions to the rule of alternate remedy.
• Assistant Commissioner of State Tax v. M/s Commercial Steel Limited [Civil Appeal No. 5121 of 2021]*: The Court relied on this case to reiterate the principle of alternate remedies and its exceptions.
• State of HP v. Gujarat Ambuja Cement Ltd [(2005) 6 SCC 499]*: The Court relied on this case to state that a writ petition is maintainable if the taxing authorities have acted beyond their jurisdiction.
• Executive Engineer v. Seetaram Rice Mill [(2012) 2 SCC 108]*: The Court relied on this case to state that the High Court can interfere if the authorities have acted beyond the provisions of the Act.
• Union of India v State of Haryana [(2000) 10 SCC 482]*: The Court relied on this case to state that the matter should be remanded back to the High Court if it involves a question of law.
• Sree Meenakshi Mills Ltd. v Commissioner of Income Tax [AIR 1957 SC 49]*: The Court relied on this case to explain the tests for the identification of questions of fact, questions of law and mixed questions of law and facts.

Final Decision

The Supreme Court allowed the appeal and set aside the judgment of the High Court dated 18 September 2017. The Court remanded the matter to the High Court for fresh consideration, stating that the High Court had not addressed the issue of jurisdiction raised by the appellant. The Supreme Court clarified that the High Court can exercise its writ jurisdiction if the order of the authority is challenged for want of authority and jurisdiction, which is a pure question of law. The Court also noted that the High Court had erred in de-tagging the writ petition of the appellant from the writ petition filed by NTPC, as the facts of the cases were substantially similar.

The Court did not decide on the merits of the issues raised by the appellant and left them open for fresh evaluation by the High Court. The Court held that the High Court should consider all the aspects of the matter, including the interpretation of the relevant provisions of the Bihar Electricity Duty Act, 1948, and the decision in State of AP v. National Thermal Power Corporation Ltd [(2002) 5 SCC 203], and then decide the matter afresh.

Flowchart of Electricity Supply and Taxation

Conclusion

The Supreme Court’s decision in M/s Magadh Sugar & Energy Ltd. vs. The State of Bihar & Ors. clarifies that the High Court has the jurisdiction to entertain a writ petition when a challenge is made to the authority of the taxing authority. The Court did not decide the main issue of taxability of sale of electricity by a generator to a licensee but remanded the matter to the High Court for fresh evaluation. The Court also noted that the High Court had erred in de-tagging the writ petition of the appellant from the writ petition filed by NTPC, as the facts of the cases were substantially similar.

The judgment underscores the importance of a thorough examination of jurisdictional issues and the need for a comprehensive interpretation of tax laws. The High Court will now need to re-evaluate the case, taking into account the Supreme Court’s observations and the relevant legal provisions. This case serves as a significant reminder of the complexities involved in electricity taxation and the importance of ensuring that such taxes are levied within the bounds of the law.