Supreme Court clarifies the need for legislative backing for water charges: Tata Iron and Steel Co. Ltd. vs. State of Bihar (2017)

LEGAL ISSUE: Whether the State can demand payment for water usage without explicit legal authorization.

CASE TYPE: Civil Law – Water Rights and Government Fees

Case Name: Tata Iron and Steel Co. Ltd. & Another vs. State of Bihar & Others

[Judgment Date]: 15 December 2017

Can a state government demand payment for water used by a company without a specific law permitting it? The Supreme Court of India addressed this crucial question in a case involving Tata Iron and Steel Company (TISCO) and the State of Bihar. This case clarifies that any levy, whether a tax or a fee, requires legislative backing.

The judgment was delivered by a bench of Justice J. Chelameswar and Justice S. Abdul Nazeer. The judgment was authored by Justice J. Chelameswar.

Case Background

Tata Iron and Steel Company Ltd. (TISCO) has an industrial unit in Jamshedpur, Jharkhand (formerly Bihar). TISCO acquired a large area of land in 1912 and 1929 for its operations. The Subarnarekha River flows past this land. TISCO has been drawing water from this river for its industrial and township needs, having established its own infrastructure for water usage.

In 1972, the land vested in the State of Bihar, but was later conveyed back to TISCO in 1984 and 1985. The State of Bihar constructed the Chandil Dam on the Subarnarekha River, upstream from TISCO’s facilities.

In 1993, the State issued a demand notice to TISCO for Rs. 31.351 million for water drawn from the river. TISCO contested this demand, arguing they had a right to use the water without payment.

Timeline

Course of Proceedings

TISCO filed a writ petition in the High Court of Jharkhand at Ranchi challenging the demand notice. They claimed riparian and easementary rights to the water. The High Court did not rule on these rights, stating they should be decided in a civil suit. However, the High Court held that the State was competent to demand payment for the water used by TISCO.

The High Court also directed the State to reconsider the rate for water used for domestic purposes, charging a lower rate than for industrial use. TISCO then appealed to the Supreme Court. The State of Jharkhand also filed a cross-appeal challenging the direction to charge a lower rate for domestic water use.

Legal Framework

The Supreme Court considered the following legal provisions:

• Article 265 of the Constitution of India: This article states that no tax can be levied or collected except by authority of law.
• Entry 17 of List II, Seventh Schedule of the Constitution of India: This entry grants states the power to legislate on water, including water supplies, irrigation, and canals.
• Entry 66 of List II, Seventh Schedule of the Constitution of India: This entry allows states to collect fees for matters in List II, excluding court fees.
• Article 366(28) of the Constitution of India: Defines “taxation” to include any tax or impost.

The Court also examined the Bihar Irrigation Act, 1876 and the Bihar Public Irrigation and Drainage Works Act, 1947, to see if they authorized the water charges.

Arguments

TISCO’s Arguments:

• TISCO argued that the demand for payment was illegal and violated Article 265 of the Constitution, as it was a compulsory exaction without any legal backing.
• They claimed absolute rights to the water from the Subarnarekha River, asserting both riparian and easementary rights.
• TISCO contended that the demand was a tax or fee without legal authority.

State of Bihar’s Arguments:

• The State argued that they had the power to legislate on water under Entry 17 of List II and collect fees under Entry 66 of List II.
• They stated that the demand was a fee, not a tax, and therefore did not require legislative sanction.
• The State claimed the Bihar Irrigation Act, 1876, provided statutory support for the demand.
• They argued that TISCO was a direct beneficiary of the Subarnarekha River Multi-Purpose Project and should pay for the water used.
• The State also suggested that there was a contractual obligation on TISCO to pay for the water.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues:

1. Whether the impugned demand is a tax or a fee.
2. Whether the prohibition under Article 265 applies only to the levy of tax or also to the collection of a fee.
3. Whether there exists any law authorizing the levy and collection of the impugned demand.

Treatment of the Issue by the Court

Authorities

The Supreme Court relied on the following authorities:

• Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell And Company Limited, (2009) 10 SCC 755: This case clarified that “tax,” “duty,” “cess,” and “fee” are all forms of imposts by the state and require legislative backing under Article 265.
• Jindal Stainless Ltd. & Another v. State of Haryana & Others, 2016 (11) Scale 1: A nine-judge bench approved the legal position stated in McDowell and Company, affirming that the term “tax” in Article 265 includes “fee.”

Judgment

The Supreme Court emphasized that the term “tax” in Article 265 includes all forms of imposts, including fees. Therefore, any demand for payment by the state must have legislative support. The Court referred to Commissioner of Income Tax, Udaipur, Rajasthan v. McDowell And Company Limited, (2009) 10 SCC 755 and Jindal Stainless Ltd. & Another v. State of Haryana & Others, 2016 (11) Scale 1.

The Court did not examine the validity of the demand under the Bihar Irrigation Act, 1876, or the Bihar Public Irrigation and Drainage Works Act, 1947. The matter was remitted to the High Court to examine these issues.

The Court also noted that there was no clear evidence of a concluded agreement between the State and TISCO that would obligate TISCO to pay for the water.

The Supreme Court stated: ““Tax”, “duty”, “cess” or “fee” constituting a class denotes to various kinds of imposts by State in its sovereign power of taxation to raise revenue for the State…This power can be exercised in any of its manifestation only under any law authorizing levy and collection of tax as envisaged under Article 265.”

The Court also stated: “The well-known and well-settled characteristic of “tax” in its wider sense includes all imposts.”

The Court also stated: “Therefore, it is now well settled that the expression “fee” is also comprehended in the expression “tax” for the purpose of Article 265 and even for the collection of a “fee”, authority of law (i.e. legislative support) is mandatorily required under the Constitution.”

What weighed in the mind of the Court?

The court was primarily focused on the legal principle that any form of compulsory exaction by the state, whether a tax or a fee, must be backed by a law. The Court also emphasized that the term “tax” in Article 265 includes “fee,” thereby eliminating the distinction between the two for the purpose of this article. The absence of a clear legal basis for the demand and the lack of a concluded agreement also influenced the Court’s decision.

Logical Reasoning

Key Takeaways

• Any demand for payment by the State, whether a tax or a fee, must have legislative backing.
• The term “tax” in Article 265 of the Constitution includes “fee.”
• States cannot demand payment for water usage without a specific law authorizing it.
• The matter was remitted to the High Court for an examination of the applicability of the Bihar Irrigation Act, 1876.

Directions

The Supreme Court remitted the matter to the High Court to examine whether the Bihar Irrigation Act, 1876, or any other law, authorized the demand for payment for water usage. The High Court was also directed to allow the parties to file further pleadings. The impugned demand was stayed during the pendency of the matter before the High Court.

Development of Law

The ratio decidendi of the case is that any form of compulsory exaction by the state, whether a tax or a fee, must be backed by a law. The Supreme Court clarified that the term “tax” in Article 265 includes “fee,” thereby eliminating the distinction between the two for the purpose of this article. This case reinforces the principle that the state’s power to levy charges is not absolute and must be exercised within the framework of the law.

Conclusion

The Supreme Court’s judgment in Tata Iron and Steel Co. Ltd. vs. State of Bihar clarifies that the State cannot demand payment for water usage without explicit legal authorization. The Court emphasized that Article 265 of the Constitution requires all forms of levies, whether taxes or fees, to be backed by a law. The matter was remitted to the High Court for further examination of the relevant statutes.