Supreme Court Upholds Dual Pricing Policy for Diesel: Indian Oil Corporation Ltd. vs. Kerala State Road Transport Corporation (2017)

Date of the Judgment: November 7, 2017. Citation: Civil Appeal No. 18917 of 2017 (@ Special Leave Petition (Civil) No. 19996 of 2013). Judges: Hon’ble Mr. Justice Arun Mishra and Hon’ble Mr. Justice Mohan M. Shantanagoudar. The Supreme Court of India addressed the legality of the Government of India’s policy to charge bulk consumers, like State Road Transport Corporations, a higher, non-subsidized price for diesel. This policy was challenged as discriminatory and a violation of Article 14 of the Constitution of India. The core issue was whether the government could withdraw subsidies for bulk consumers, thereby impacting public services.

Case Background

The Kerala State Road Transport Corporation (KSRTC) challenged the Government of India’s decision to implement a dual pricing policy for diesel. KSRTC, established on April 1, 1965, operates a large fleet of buses and serves an average of 35 lakh passengers daily. It also provides free travel to certain groups, including physically disabled persons, freedom fighters, and journalists. The Ministry of Petroleum and Natural Gas issued a directive on January 17, 2013, stating that bulk consumers of diesel would no longer receive subsidies and would have to pay market-determined prices. KSRTC, which purchases 4,10,000 liters of diesel daily, claimed this policy was discriminatory and resulted in substantial financial losses. Similar writ applications were filed in other states, challenging the policy’s legality and its impact on public services.

Timeline:

Course of Proceedings

The Kerala State Road Transport Corporation (KSRTC) filed a writ petition in the High Court of Kerala at Ernakulam, challenging the dual pricing policy for diesel. The High Court initially granted an interim stay in favor of KSRTC. Subsequently, similar writ petitions were filed in other High Courts across India, some of which also granted interim stays. The Supreme Court of India then transferred all these writ petitions to itself and stayed the interim orders passed by the High Courts, observing that no interim orders should have been passed in such policy matters. The Supreme Court then heard the matter to decide on the validity of the policy and the payment for the period when interim stays were in effect.

Legal Framework

The core of the legal framework revolved around the Government of India’s policy decisions regarding the pricing of petroleum products. In 2002, the Administered Pricing Mechanism for petroleum products was dismantled, with the exception of PDS Kerosene and Domestic LPG. While the price of petrol was made market-determined, the government continued to regulate diesel prices. The Oil Marketing Companies (OMCs) incurred significant under-recoveries due to the difference between international prices and regulated domestic prices. The government appointed an Expert Group under Dr. Kirit S. Parikh in 2009, which did not find compelling reasons to subsidize petroleum products. In 2010, the Empowered Group of Ministers (EGoMs) decided to make petrol prices market-determined, but diesel prices remained regulated. In January 2013, the government decided to deregulate diesel prices in a phased manner, selling diesel to bulk consumers at non-subsidized prices. This decision was aimed at reducing the subsidy burden and allocating more funds to social sector schemes.

Arguments

The arguments presented before the Supreme Court highlighted the opposing viewpoints on the dual pricing policy for diesel:

• Arguments by the Petitioners (State Road Transport Corporations):
  • The dual pricing policy was arbitrary and discriminatory, violating Article 14 of the Constitution of India.
  • State Road Transport Corporations provide essential public services and should not be treated as commercial bulk consumers.
  • The policy imposed a significant financial burden on these corporations, making it difficult to maintain services, pay pensions, and salaries.
  • The government has a constitutional obligation to provide subsidies and concessions for public services.
• Arguments by the Respondents (Government of India):
  • The policy was a result of due deliberation and was necessary to reduce the subsidy burden on petroleum products.
  • The decision was aimed at fiscal consolidation and allocating more funds to social sector schemes.
  • The Oil Marketing Companies (OMCs) were incurring substantial losses due to under-recoveries, necessitating the withdrawal of subsidies.
  • The government had the right to withdraw the subsidy, which was a privilege and not a right.
  • The policy was not sudden or arbitrary, but a phased deregulation process.

The petitioners argued that the policy unfairly targeted public service providers, while the respondents maintained that it was a necessary step for economic and fiscal stability. The government emphasized that the subsidy was a privilege that could be withdrawn, and that the policy was aimed at ensuring long-term energy security and fiscal consolidation.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issue for consideration:

1. Whether the policy decision taken by the Government of India to sell diesel to bulk consumers at non-subsidized, market-determined prices is valid.

Treatment of the Issue by the Court

The following table demonstrates how the Court decided the issue:

Authorities

The Supreme Court relied on the following authorities while addressing the issue:

• State of Rajasthan v. J.K. Udaipur Udyog Ltd. (2004) 7 SCC 673 (Supreme Court of India): This case established that an exemption is a privilege, not a right, and can be withdrawn by the government.
• Shree Sidhbali Steels Ltd. v. State of Uttar Pradesh & Ors. (2011) 3 SCC 193 (Supreme Court of India): This case reiterated that a rebate is a privilege granted by the government and can be withdrawn.
• Ayurved Shastra Seva Mandal & Anr. v. Union of India & Ors. (2013) 16 SCC 696 (Supreme Court of India): This case held that privileges granted in education cannot be transformed into rights.
• Madras City Wine Merchants’ Association & Anr. v. State of T.N. & Anr. (1994) 5 SCC 509 (Supreme Court of India): This case observed that a privilege exists only during its operative period.
• Har Shankar & Ors. v. The Dy. Excise & Taxation Commissioner & Ors. (1975) 1 SCC 737 (Supreme Court of India): This case held that a matter of privilege cannot be enforced as a right.

Judgment

How each authority was viewed by the Court?

• The Court relied on State of Rajasthan v. J.K. Udaipur Udyog Ltd. [2004] 7 SCC 673* to emphasize that an exemption is a privilege, not a right, and can be withdrawn.
• The Court cited Shree Sidhbali Steels Ltd. v. State of Uttar Pradesh & Ors. [2011] 3 SCC 193* to reinforce the principle that a rebate is a privilege and can be withdrawn.
• The Court referred to Ayurved Shastra Seva Mandal & Anr. v. Union of India & Ors. [2013] 16 SCC 696* to support the view that privileges cannot be transformed into rights.
• The Court used Madras City Wine Merchants’ Association & Anr. v. State of T.N. & Anr. [1994] 5 SCC 509* to highlight that a privilege is valid only during its operative period.
• The Court applied Har Shankar & Ors. v. The Dy. Excise & Taxation Commissioner & Ors. [1975] 1 SCC 737* to conclude that a matter of privilege cannot be enforced as a right.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need for fiscal discipline and the economic realities facing the Oil Marketing Companies (OMCs). The Court emphasized that subsidies are a matter of privilege, not a right, and can be withdrawn by the government. The financial burden on OMCs due to under-recoveries and the government’s need for fiscal consolidation were key factors.

Fact:Law Ratio Analysis: The Court’s decision was influenced more by legal principles (70%) than factual aspects (30%). The legal interpretation of subsidies as privileges and the government’s fiscal policy were the primary drivers of the judgment.

The Court’s reasoning was based on the legal principle that subsidies are a privilege, not a right, and therefore, the government has the authority to withdraw them. This was coupled with the economic rationale of fiscal consolidation and the need to reduce the financial burden on Oil Marketing Companies (OMCs). The court rejected the argument that State Road Transport Corporations had a right to continued subsidies due to their public service role.

The Court quoted the following from the judgment:

“An exemption is by definition a freedom from an obligation which the exemptee is otherwise liable to discharge. It is a privilege granting an advantage not available to others.”

“The rebate was a privilege granting an advantage which was not made available to others.”

“Thus, we find no merit in the submissions raised that subsidy should have been continued as an exception for the State Road Transport Corporations, though they may have been rendering public service.”

Key Takeaways

• The Supreme Court upheld the Government of India’s policy to charge bulk consumers a non-subsidized, market-determined price for diesel.
• Subsidies are considered a privilege, not a right, and can be withdrawn by the government.
• State Road Transport Corporations cannot claim a right to continued subsidies, even if they provide public services.
• The decision was based on the need for fiscal consolidation and reducing losses to Oil Marketing Companies (OMCs).
• The judgment has implications for other public sector entities that rely on government subsidies.

Directions

The Supreme Court directed that:

• With respect to the State of Kerala, the State Government was obligated to reimburse the deficit amount to respondents Nos. 2 and 3 (Oil Marketing Companies) as per the undertaking given to the High Court.
• For other states, the parties were allowed to work out equities, and otherwise, the bulk consumers were required to pay the Oil Marketing Companies (OMCs).
• The court noted that in the matters of the State of Karnataka and State of Tamil Nadu, there was no interim order and the concerned Transport Corporations of the States have incurred no liability.

Development of Law

The ratio decidendi of this case is that subsidies are a matter of privilege, not a right, and the government has the authority to withdraw them based on fiscal policy. This judgment reinforces the principle that the government has the power to make policy decisions regarding subsidies and that these decisions are not subject to judicial interference unless they are arbitrary or discriminatory. There is no change in the previous position of law, but it clarifies the scope of government’s power in fiscal matters and the limitations on claiming subsidies as a right.

Conclusion

The Supreme Court upheld the Government of India’s decision to implement a dual pricing policy for diesel, ruling that subsidies are a privilege and not a right. This decision underscores the government’s authority to make fiscal policy decisions and the limitations on judicial interference in such matters. The judgment has significant implications for public sector entities that rely on subsidies, emphasizing the need for fiscal discipline and economic stability.

Category

Parent Category: Fiscal Law

Child Categories:

• Government Policy
• Subsidies
• Pricing Policy
• Article 14, Constitution of India
• Oil Marketing Companies
• State Road Transport Corporations
• Administered Pricing Mechanism
• Fiscal Consolidation
• Public Services

Parent Category: Constitution of India

Child Categories:

• Article 14, Constitution of India

FAQ

Q: What was the main issue in the Indian Oil Corporation Ltd. vs. Kerala State Road Transport Corporation case?

A: The main issue was the validity of the Government of India’s policy to charge bulk consumers, like State Road Transport Corporations, a higher, non-subsidized price for diesel.

Q: What did the Supreme Court decide about the dual pricing policy for diesel?

A: The Supreme Court upheld the validity of the dual pricing policy, stating that subsidies are a privilege, not a right, and can be withdrawn by the government.

Q: Can State Road Transport Corporations claim a right to subsidies?

A: No, the Supreme Court held that State Road Transport Corporations cannot claim a right to continued subsidies, even if they provide public services.

Q: Why did the government implement the dual pricing policy?

A: The government implemented the policy to reduce the subsidy burden on petroleum products, achieve fiscal consolidation, and reduce losses to Oil Marketing Companies (OMCs).

Q: What are the implications of this judgment for other public sector entities?

A: The judgment implies that other public sector entities that rely on government subsidies may also face similar policy changes, as subsidies are considered a privilege and not a right.