STATE OF GUJARAT THRO THE UNDER SECRETARY V. UNION OF INDIA,MINISTRY OF PETROLEUM & NATURAL GAS,

SCA/13943/2011

AI Insights

The case revolves around a dispute between the State of Gujarat and the Union of India, along with ONGC, concerning the calculation of royalty on crude oil extracted from onshore blocks in Gujarat. The State of Gujarat challenged the Central Government's decision to allow royalty calculations based on post-discount prices, arguing it contravened the Oilfields (Regulation & Development) Act, 1948, which stipulates royalty should be calculated on pre-discount prices. The court examined various notifications and resolutions issued by the Central Government and found that the shift to post-discount pricing was not legally supported and undermined the financial entitlements of the State under the Act.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 739266 (HC-GUJARAT)
• Appeal Type: Others
• Pronouncement Date: 30-11-2013
• Assessment Year: misc
• Other Referred Cases: State of West Bengal v. Kesoram Industries and others, Directorate of Enforcement v. Deepak Mahajan and another, Commissioner of Income Tax, Dehradun and another v. Enron Oil and Gas India Limited
• Laws Referred To: Oilfields (Regulation & Development) Act, 1948, Petroleum and Natural Gas Rules, 1959
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: P S CHAMPANERI; AJAY MEHTA
• Assessee Lawyers: ASPI KAPADIA
• Keywords: ONGC; Royalty calculation; Union of India; Post-discount price; Pre-discount price; State of Gujarat
• Section: 14; 6A

Judgement Text

"C/SCA/13943/2011 CAV JUDGEMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION NO. 13943 of 2011 FOR APPROVAL AND SIGNATURE: HONOURABLE THE CHIEF JUSTICE MR. BHASKAR BHATTACHARYA and HONOURABLE MR.JUSTICE J.B.PARDIWALA ================================================================ 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the Constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ================================================================ STATE OF GUJARAT THRO THE UNDER SECRETARY....Petitioner(s) Versus UNION OF INDIA,MINISTRY OF PETROLEUM & NATURAL GAS, & 1....Respondent(s) ================================================================ Appearance: MR ASPI M KAPADIA, ADVOCATE for the Petitioner(s) No. 1 MR PS CHAMPANERI, ADVOCATE for the Respondent(s) No. 1 MR AJAY R MEHTA, ADVOCATE for the Respondent(s) No. 2 ================================================================ CORAM: HONOURABLE THE CHIEF JUSTICE MR. BHASKAR BHATTACHARYA Page 1 of 43 C/SCA/13943/2011 CAV JUDGEMENT and HONOURABLE MR.JUSTICE J.B.PARDIWALA Date : 30/11/2013 CAV JUDGEMENT (PER : HONOURABLE MR.JUSTICE J.B.PARDIWALA) By this Writ application under Article 226 of the Constitution of India, the State of Gujarat seeks to challenge the alleged arbitrary and unreasonable action of the Union of India and the Oil & Natural Gas Commission Ltd. (for short, 'the ONGC') in respect of payment of royalty on the basis of post- discount prices of crude extracted from the onshore blocks situated in the State of Gujarat which, according to the petitioner, is in contravention of the provisions of the Oilfields (Regulation & Development) Act, 1948 (for short, 'the Oilfields Act'). The State of Gujarat also seeks to challenge the action of the Government of India, Ministry of Petroleum & Natural Gas of addressing a letter dated 23rd May 2008 to the Director PPAC (Petroleum Planning & Analysis Cell), New Delhi, thereby withdrawing the instructions issued by the Ministry in its letters dated 30th October 2003 and 28th March 2008 respectively to the effect that the revenue of the State Governments in terms of royalty of crude oil would not be affected by the discount on the ONGC crude oil and that the onshore royalty payable to the State Governments would continue to be paid on pre-discount prices. The petitioner has also prayed for a consequential relief Page 2 of 43 C/SCA/13943/2011 CAV JUDGEMENT for the payment of royalty based on pre-discount, fair market driven wellhead price on crude oil produced from the onshore blocks situated in the State of Gujarat. Case of the Petitioner : In the State of Gujarat there are 181 Mining Leases in operation, of which 154 are under the nomination of the ONGC. These blocks are allotted to the ONGC by the Central Government. The crude production of Gujarat for the year 2010-11 was 54,71,818 MT net crude. Out of which 53,48,091 MT was produced by the ONGC thereby suggesting that 97.7% of the total crude production of Gujarat is by the ONGC. In exercise of its powers under Entry 53 of List-1 of Schedule VII to the Constitution of India, the Parliament has enacted the Oilfields Act. This Act provides, inter alia, for regulation of oilfields and development of mineral oil resources. Section 6A of the Act, introduced in the year 1969, pertains to royalties in respect of mineral oils. Sub-section (2) of Section 6 provides that the holder of the mining lease (i.e. the ONGC) shall pay royalty in respect of mineral oil mined, quarried, evacuated or collected by it from the leased area at the rate for the time being specified in the Schedule in respect of that mineral oil. In terms of Section 6A(4), the Central Government is empowered to amend the Schedule to the Act by way of a notification in the official gazette for enhancing or reducing the rate at which royalty is payable. It further provides that the rate of royalty fixed by the Central Government should not Page 3 of 43 C/SCA/13943/2011 CAV JUDGEMENT exceed 20% of the sale price of the mineral oil at the oilfields or the oil wellhead, as the case may be. The Central Government has also framed rules, called the “Petroleum and Natural Gas Rules, 1959’ (hereinafter referred to as 'the Rules') under Sections 5 and 6 of the Oilfields Act. Rule 14 of these Rules pertain to the payment of royalty. Earlier, the royalty payable in respect of crude oil, in terms of the Schedule to the Act, was fixed by the Central Government at Rs.481 per metric ton. However, in the year 1997 a decision was taken by the Central Government to dismantle the ‘Administered Price Mechanism’ (APM). In view of the dismantling of the Administered Price Mechanism, the Central Government decided to alter the rate of royalty. A committee was appointed by the Central Government vide Office Memo No.O-22013/2/98-ONGC.III dated 26th April 2000 inter alia for recommending the criteria for determining royalty on crude oil including the royalty rate. The said Committee was known as the Mauskar Committee. The said committee prepared and submitted its report dated 25th November 2001. In paragraph 6.12.1 of the said report, the committee has observed as under : “6.12.1. According to the National Institute of Public Finance and Policy (NIPFP), Royalty is a return to the owner of land. It is only natural that this return should depend upon the price of oil in case of crude oil. Royalty fixation requires the rationalization of pricing of oil and moving to market determined prices. Crude oil being a largely imported energy resource of the country, the international price of this resource should be taken as the basis for the estimation of royalty as this would reflect the offer price of oil by the consumer in an open market.” Page 4 of 43 C/SCA/13943/2011 CAV JUDGEMENT In paragraph 7.4.1 (Conclusions & Recommendations) it has been stated that the committee feels that the market driven price obtained/obtainable by the producers should be considered for determining royalty under deregulated price regime. The committee also made recommendations for determination of well head price and the rate of royalty. In Paragraph 7.4.7(i) the committee has inter alia recommended as below : “After 1.4.2002 under the deregulated regime the wellhead price as derived from the market driven price obtained/ obtainable by the producers based on arm’s length transactions in terms of the relevant recommendations be considered for royalty calculations.” Based on such recommendations of the Mauskar Committee aforenoted, the Central Government issued a resolution dated 17th March 2003 which inter alia provides for payment of royalty for the period after 1st April 2002. The resolution provides for payment of royalty at a rate of 20% of the wellhead price. The wellhead price for onland production is to be derived after deducting 7.5% from the crude oil price. Para 2(vii)(a) of the resolution dealing with the royalty for the period after 1st April 2002, states as follows: “The wellhead price of crude oil as derived from the market driven price obtained/obtainable by the producers based on ‘arm’s length transactions’ will be considered for royalty calculations.” Para 2(iii) of the afore noted notification states that Page 5 of 43 C/SCA/13943/2011 CAV JUDGEMENT “royalty will be calculated in accordance with the existing methodology, i.e. on ‘cum royalty’ basis”, and a ‘Note-1’ at the end of the notification sets out the following formula, as far as the existing methodology for calculation of royalty is concerned : Royalty Amount = Wellhead Price x Royalty Rate 100 + Royalty Rate The said resolution dated 17th March 2003 also provides for a revised royalty dispensation for the period between 1st April 1998 and 31st March 2002 with a retrospective effect. The said resolution was published in the Gazette of India: Extraordinary and was acted upon and implemented by the Central Government and ONGC respectively, with immediate effect. Based on the said resolution, the ONGC started making payment of royalty according to the provisions of the said resolution from the month of March 2003 itself. Based on the said resolution the ONGC made a revised royalty dispensation of an amount of Rs.175,91,05,511/- for the period 1st April 1998 to 31st March 2002 to the State of Gujarat on 26th March 2004 and for the period between 1st April 2002 and 28th February 2003 paid a sum of Rs.292,00,00,000/- as revised differential amount of royalty to the State of Gujarat on 25th March 2003. Therefore, though the resolution dated 17th March 2003 was termed as a resolution and not a notification, the same was duly published and notified and was duly acted upon by the parties. On 30th October 2003, the Government of India, Page 6 of 43 C/SCA/13943/2011 CAV JUDGEMENT addressed a communication to the heads of the National Oil Companies and to the Director, Petroleum Planning and Analysis Cell (PPAC), pertaining to the ‘mechanism for sharing the under-recoveries of Oil Marketing Companies on account of the non-revision in the selling prices of PDS Kerosene and Domestic LPG during 2003–2004’. The said communication provided, inter alia, for discounts to be given by the ONGC and Gas Authority of India Limited (GAIL) to the Oil Marketing Companies. However, in para-2(vi) of the letter itself, the Central Government unequivocally clarified that: “The revenue of the State Government in terms of royalty on crude oil will not be affected by the discount on ONGC’s crude oil.” One another communication dated 28th March 2008 was issued by the Central Government, which, inter alia, reiterates that the discounts offered by the ONGC would have no effect in respect of the onshore royalty payable to the State Governments. On 16th December 2004, a Notification was issued by the Central Government apparently in terms of paragraph 3 of the aforementioned resolution dated 17th March 2003, amending the Schedule to the Act and prescribing the rates of royalty, in terms of the decisions contained in the resolution of 17th March 2003. Para-1(1)(B)(ii) of the Schedule, as amended by this notification, fixes the royalty in respect of crude oil production from areas awarded on nomination basis to National Oil Companies, with effect from 1st April 2002, as 20% of the wellhead price. This Notification also inserted two Page 7 of 43 C/SCA/13943/2011 CAV JUDGEMENT ‘Notes’ (‘Note 1’ and ‘Note 2’), in the Schedule, which read as follows: “Note 1 : Well Head Price of Crude Oil and Casing Head Concentrate for areas covered under 1(1)(B) and 2(1)(B) above will be determined by deducting 7.5% and 10% of the Crude Oil and Casing Head Condensate price considered for onland and offshore production respectively. Royalty will be calculated on Cum-royalty basis as under: Royalty Amount = Wellhead Price x Royalty Rate 100 + Royalty Rate Note 2 : Since consultations with the concerned State Governments took some time, it has become necessary to revise the rate of royalty with retrospective effect. The oil producing states stand to benefit and other states are not likely to be adversely affected.” One another Committee was constituted in the year 2003 by the Central Government for determining the wellhead price of minerals oils (crude oil, wellhead condense and natural gas). The said committee was reconstituted several times. Finally, the committee gave its report in July, 2006. Based on the recommendations of the said committee, another Notification dated 20th August 2007 under Section 6A(4) of the Act, was issued by the Central Government, making certain modifications to the Schedule. The aforesaid notification, inter alia, replaced ‘Note 1’ in the Schedule, with the following: Page 8 of 43 C/SCA/13943/2011 CAV JUDGEMENT “Note 1: (1) The well head price of crude oil and casing head condensate for nominated blocks of Oil and Natural Gas Corporation Limited or Oil India Limited shall be determined by deducting rupees one thousand two hundred and fifty one only per metric ton and rupees nine hundred forty seven only per metric ton for onshore and offshore respectively from the sale price of crude oil or casing head condensate. (2) The amounts specified in clause (1) shall be the post well head cost which shall be valid for a period of three years with effect from 1st April, 2007, or such period till the revised rates are notified. (3) Oil Industry Development Cess and Education Cess thereon shall not form part of post well head cost. (4) Royalty will be calculated on cum-royalty basis as under : Royalty Amount = Wellhead Price x Royalty Rate 100 + Royalty Rate” In the Notification dated 20th August 2007, Note-1 was replaced and instead of a deduction as a percentage, a fixed amount of Rs.1,251/- per MT for onshore crude oil was prescribed. It deserves to be noted that the royalty is required to be paid on the crude which is exploited. The crude which is exploited would contain various impurities, such as, vapour, gas, water etc. After the crude is exploited, certain preliminary refining/processing is required to be done. After the preliminary refining/processing is done, the crude is also required to be transported for delivery till the delivery point. Section 6A of the Oilfields Act provides for the payment of royalty upon the sale price of the mineral oil at the Oilfields Page 9 of 43 C/SCA/13943/2011 CAV JUDGEMENT or the Oil wellhead. The royalty therefore is payable on the crude that is exploited in its original form. The marketing of the crude is done after the preliminary refining/processing. The market price of crude would include preliminary refining/processing and certain transportation cost also. Royalty is not required to be paid on such refining/processing and transportation costs. Therefore, a deduction as a percentage or a fixed amount is made to arrive at the actual value of the crude at the Oilfields or the Oil wellhead. The fixed amount of deduction is a more rational and a fair method of deduction as the actual costs can be deducted. Therefore, by the notification dated 20th August 2007, the only change that was made to the earlier notification of 16th December 2004 was that for determining the well head price of crude, instead of a percentage based deduction of 7.5%, a deduction of fixed amount of Rs.1,251/- per Metric Ton was prescribed. No other change was made by the said notification of 20th August 2007. Therefore, the situation in all other aspect as it existed upon the issuance of the Notification dated from 16th December 2004 continued. The Union of India, in the year 2003 adopted a mechanism for sharing the under-recovery of the oil marketing companies on account of non-revision in the selling price of PDS Kerosene and Domestic LPG, whereby the Government inter alia directed the upstream marketing company i.e. the ONGC to give a discount on the sale of crude to the downstream companies viz. Indian Oil Corporation Ltd. (IOCL), Bharat Petroleum Corporation Limited (BPCL) and Hindustan Petroleum Corporation Limited (HPCL). However, clause (viii) makes it explicit that the revenue of the State Government in Page 10 of 43 C/SCA/13943/2011 CAV JUDGEMENT terms of royalty on crude oil would not be affected by the discount on ONGC’s crude oil. It is to be noted that all the crude exploited by ONGC from the oilfield situated in Gujarat is sold to Indian Oil Corporation limited. A similar statement has been made by the Union of India in its letter dated 28th March 2008 whereby it has been clarified that the aforesaid arrangement for under recovery shall not have any effect in respect of onshore royalty payable to the State Government(s), which shall continue to pay at the pre-discount prices, in line with the existing instructions of the Ministry. The aforesaid letter is not on record as is not available with the petitioner, however, the relevant passage of the said letter has been reproduced in the letter dated 23rd May 2008 of the Union of India which is at Annexure-A of the application. According to the petitioner, any discount offered by the ONGC to its buyer i.e. Indian Oil Corporation cannot be at the cost of the lessor-State Government, and should not be taken into account for the purpose of determination of the wellhead price, and the calculation of royalty. The ONGC and the Indian Oil Corporation are both Central Government PSUs controlled by the Union of India. Both are bound by the directives of the Union of India. To compensate for under recoveries by the downstream public sector marketing companies (i.e. IOC, BPCL & HPCL), the Union of India, through its Petroleum Planning and Analysis Cell issues directions for each quarter in respect of the discount to be given in respect of the sale of crude by the upstream oil companies i.e. the ONGC and the Oil India Ltd. Page 11 of 43 C/SCA/13943/2011 CAV JUDGEMENT It is the case of the petitioner that the subsidy on the petroleum products given by the Central Government and the discounts directed to be given in respect of sale of crude by the ONGC to the downstream oil companies of the Central Government is an internal matter between the Union of India and the upstream and downstream oil companies which are Central Government PSUs. The State Government has nothing to do with the same. The discounts directed to be given by the Central Government between its PSUs (i.e. ONGC & IOC) cannot affect the amount of royalty that is rightfully recoverable by the State of Gujarat under the provisions of the Oilfields Act. It is also the case of the petitioner that the ONGC went against the legal provisions and the established practice of paying royalty at the pre-discounted prices and addressed a letter dated 28th February 2008 to the Government of Gujarat taking a stance that the royalty would have to be calculated on the basis of the post-discount price of crude oil, since the royalty amount would otherwise exceed the statutory selling of 20% of the ONGC sale price. The Central Government vide its communication dated 23rd May 2008 withdrew its earlier instructions issued vide letters dated 30th October 2003 and 28th March 2008 respectively to the effect that the discounts given by the ONGC would not affect the royalty payable to the State Governments. The State Government i.e. the petitioner herein vide Page 12 of 43 C/SCA/13943/2011 CAV JUDGEMENT letter dated 31st May 2008 through its Chief Secretary represented to the Central Government requesting it to direct the ONGC to withdraw its direction regarding payment of royalty on crude oil on the basis of the discounted price and to continue to pay the royalty according to the “Ongoing Methodology” for the calculation of royalty. In response to the letter dated 31st May 2008 of the Chief Secretary of the Government of Gujarat, the Central Government vide its letter dated 12th July 2008 took the stance that the ONGC’s action in the matter had flowed from a decision of the ONGC’s Board. The exact words in the letter dated 12th July 2008 are as under : “It transpires that ONGC’s action in this regard as flowed from a decision of ONGC’s Board. As ONGC’s action of making adjustments from Royalty already paid is not in consonance with the MoP&NG’s guidelines, we are advising ONGC to review its decision. However, I may point out that as per the law, payment of royalty on onshore crude cannot exceed 20% of the wellhead price, where price is construed as the ‘market driven price obtain/obtainable by the producers’. As for your view that discount offered by ONGC to Oil Marketing companies (OMCs) is not relevant for the calculation of royalty payable, I may add that priced discount given by ONGC, as per Burden sharing Mechanism approved by the Government of India, is a direct bearing on the “Price obtained” by ONGC for crude oil produced by it, and therefore, a bearing on the royalty payable to the State Governments.” According to the petitioner, from May 2008 till the date of the filing of the petition, the ONGC has made payment of Page 13 of 43 C/SCA/13943/2011 CAV JUDGEMENT royalty on crude oil produced from nomination fields in Gujarat on the post-discount prices. The petitioner has preferred several representations to the Government of India on the subject of payment of royalty on crude oil at the market price. The petitioner has also addressed letters to the ONGC requesting it to make payments of royalty on crude oil at the market price. According to the petitioner, despite the same, the Central Government and the ONGC have continued to pay royalty on the pre-discount prices. According to the petitioner, the ONGC is liable to make payment of Rs.3821,18,78,481/- as royalty for the period between April, 2008 and June 2011. According to the petitioner the ONGC is also liable to pay a penalty of Rs.913,72,95,455/- according to the provisions of the Rule 23(1) of the Petroleum and Natural Gas Rules, 1959. In the circumstances referred to above, according to the petitioner, they have been left with no other option, but to approach this Court by this writ-application and accordingly have prayed for the appropriate reliefs. Stance of the Respondent no.1 - Union of India. According to the Union of India, with a view to protect the Consumers from the inflationary impact of International Oil prices, it has been modulating the retail selling price of sensitive petroleum products, viz. Diesel, BDS Kerosene and domestic LPG. Prior to 26th June 2010, the price of petrol was Page 14 of 43 C/SCA/13943/2011 CAV JUDGEMENT also modulated by the Central Government. As a result of the same, the three Public Sector Oil marketing companies, namely, Indian Oil Corporation Ltd., (IOCL), Bharat Petroleum Corporation Ltd., (BPCL) and Hindustan Petroleum Corporation Ltd., (HPCL) incurred under recoveries on the sale of such petroleum products. According to the Central Government it had to evolve a “Burden Sharing Mechanism” in 2003-2004. As a result of the Burden Sharing Mechanism, the upstream oil marketing companies had to suffer a huge loss. The upstream oil companies, namely, the ONGC and the Oil India Ltd., were directed by the Central Government to give discount on the sale of crude by them to the downstream oil companies such as IOCL, BPCL and HPCL. According to the Union of India, despite such discount being given by the ONGC to IOC, the ONGC was paying royalty on pre-discounted prices during the years 2003-2004 to 2007- 2008 which not only distorted the royalty calculation mechanism but also resulted in a breach of statutory provisions whereby the royalty was not to exceed 20% of the sale price of the mineral oil. According to the Union of India, in such circumstances it had to address a letter dated 23rd May 2008 along with the opinion of the Ministry of Law & Justice, withdrawing its earlier orders which had stated that the discounts offered by the upstream oil companies to the downstream oil companies would not affect the royalty payment to the State Governments and thereby, bringing royalty competition for Page 15 of 43 C/SCA/13943/2011 CAV JUDGEMENT crude oil to the State Governments on the same principle applicable to the Central Government. According to the Union of India such action is in consonance with the principle of taxation and that the royalty is a function of actual price realized and not notional pre- discount price. It is also the case of the Union of India that the resolution dated 17th March 2003 issued by it was a resolution and not a Notification. In the said resolution it has been stated that the requisite notifications, orders etc. to implement the decision taken by it would be issued separately. Accordingly to implement the new scheme a Notification dated 16th December 2004 was issued superseding the earlier resolution dated 17th March 2003. According to Union of India, consequent upon the decision taken in the year 1997 of phased dismantling of Administered Price Mechanism (APM) from the petroleum sector, a Committee under the Chairmanship of Shri J.M.Mausker was appointed. Based on the recommendations of the Committee the Central Government circulated a new scheme of royalty vide resolution dated 17th March 2003. According to the Union of India, it emphasized that recommendations were made by the Mausker Committee keeping in mind the proposed deregulation of the petroleum sector. However, since complete deregulation has not taken place so far, the Burden Sharing Mechanism is being followed by the Central Government leading to discount on realization Page 16 of 43 C/SCA/13943/2011 CAV JUDGEMENT from the sale of crude oil. According to the Union of India, the Resolution dated 17th March 2003 provided for royalty payment at 20% of the wellhead price till the year 2006-07. It further provided that the conversion process might commence w.e.f. 2007-08 with tapering rate of royalty of 1.5% each year so as to facilitate conversions with NELP rates of 12.5% within a period of 5 years i.e. by 2011-12. However, according to the Union of India the process of tapering has not yet started. In the circumstances referred to above, according to the Union of India there is no merit in this petition and the same deserves to be rejected. Stance of the Respondent No.2 - ONGC :- According to the ONGC, under the provisions of Section 6A of the Oilfields (Regulation & Development) Act, 1948 enacted under Entry 53 of List 1 of Schedule VII to the Constitution of India it is the sole prerogative of the Central Government to fix the royalty. It is the stance of the ONGC that under Section 6A (4) Proviso, the petitioner is not entitled to a royalty in excess of 20% of the sale price of the mineral oil. Nevertheless, the ONGC on a specific directive from the Central Government has paid much higher royalty during the period between 2003-04 and 2007-08 almost to the extent of 49.18% in the year 2007-08 as a result of which Rs.3419 crore excess royalty has been paid. According to the ONGC considering the provisions of the Page 17 of 43 C/SCA/13943/2011 CAV JUDGEMENT Act and the Notification, the royalty is payable only on the actual price realized and not on any “notional” pre-discount amount. According to the ONGC the discount given by them is real and is a result of compliance of directions from the Government. The effect of the discount is that the notional pre-discount amount gets reduced. It is the case of the ONGC that the royalty calculation should not be on any other amount but should be on the actual and the real wellhead price, which is the price after the discount. It is also the case of the ONGC that it should not be asked to pay the statutory levy on a pre-discount amount which would result in it being subjected to tax on income that had never accrued to it. The ONGC has accordingly tried to justify the payment of 20% royalty on the actual sale price w.e.f. August, 2008. It is also the case of the ONGC that the phrase “sale price” occurring in Note-1 of the Notification dated 20th August 2007 and which also occurs in Section 6A(4) proviso of the Act could only mean the actual sale price received by the ONGC for sale of the crude oil to the downstream OMC’s. According to the ONGC any attempt to re-write or read down the said phrase to mean a “notional” pre-discount market driven price would be contrary to the expressed language of the statute and to the plain meaning, besides compelling the ONGC to pay royalty in respect of an amount never received by it. Page 18 of 43 C/SCA/13943/2011 CAV JUDGEMENT In such circumstances referred to above, according to the ONGC there is no merit in this petition and the same deserves to be rejected. Submissions on behalf of the petitioner : Mr.Aspi Kapadia, the learned Counsel appearing for the petitioner submitted that the stance of the Union of India as well as the ONGC is quite unreasonable and misconceived. Mr.Kapadia submitted that the 20% ceiling should be interpreted with reference to the fair value of the crude at the wellhead i.e. the fair market value and not the discount price of crude at which the ONGC sells to IOC upon the directions of the Union of India. Mr.Kapadia submitted that the table of discounts produced on record would indicate that the discounts directed by the Central Government go as high as upto 95% to 96% which reduces the royalty amount of the State Government to practically Nil. Mr.Kapadia also submitted that the deregulation has already taken place to a large extent. According to him petrol is totally deregularized. Diesel is now almost deregularized and the prices of diesel are hiked upto the market value in a phased manner every month. The giving of subsidy to certain petroleum products could be a policy decision of the Union of India but the same cannot have any relation or bearing on the payment of royalty under the provisions of the Oilfields Act to the State Government. Mr.Kapadia also submitted that whether to undertake the process of conversions or at what point of time such process Page 19 of 43 C/SCA/13943/2011 CAV JUDGEMENT should be undertaken would be the decision of the Central Government. If the process of conversions is not carried-out by the Central Government then in such circumstances the Central Government cannot put a cut in the payment of royalty by adopting any arbitrary method. According to Mr.Kapadia the arbitrariness is writ large in the form of withdrawing certain executive instructions contained in the earlier letters of the Central Government. Mr.Kapadia contended that the reduction in the payment of royalty is permissible only by a legal and valid amendment in the provisions of the Oilfields Act. Mr.Kapadia submitted that the petition merits consideration and deserves to be allowed. Mr.Gaurab Banerjee, the learned Solicitor General of India appearing with Mr.Ajay Mehta, the learned advocate for the ONGC, submitted that the petition filed by the State of Gujarat is totally misconceived and untenable in law. Mr.Benarjee submitted that the issue of payment of royalty under the provisions of the Oilfields Act falls under the powers exercised under Entry 53 of List-1 of Schedule-VII to the Constitution of India and, therefore, it is the prerogative of the Central Government to take care of the issue of payment of royalty and the State Government cannot have any say in the matter. Mr.Banerjee submitted that according to the provisions of Section 6A of the Oilfields Act, the petitioner is not entitled to royalty in excess of 20% of the sale price of the mineral oil at Page 20 of 43 C/SCA/13943/2011 CAV JUDGEMENT the wellhead whereas on a specific directives of the Central Government, his client has paid much high royalty between the period 2003-2004 and 2008-2009 (as high as 49.18% in the year 2007-08). Mr.Banerjee submitted that there being no merit in this petition, the same deserves to be rejected. Submissions on behalf of Respondent no.1 Union of India : Mr.P.S.Champaneri, the learned Assistant Solicitor General of India adopted all the submissions canvassed by Mr.Banerjee, the learned Additional Solicitor General of India who appeared for the ONGC. However, Mr.Champaneri laid much emphasis on the fact that the basic objective of the Burden Sharing Mechanism followed by the Government of India is to protect the interest of the end consumer i.e. general public including the people of Gujarat from the impact of rising international oil prices so that the full impact of the International oil prices are not foisted on to the general public. Mr.Champaneri tried to justify the withdrawal of the provisions of Para 2(iv) of the Order dated 30th October 2003 on the premise that when the ONGC could realize only post- discount price from the Refinery and if the ONGC is asked to make payment of royalty on a pre-discount sell price then it would amount to paying excess royalty on the revenue without realizing the same. In such circumstances, according to Mr.Champaneri there Page 21 of 43 C/SCA/13943/2011 CAV JUDGEMENT is no illegality committed by the Union of India and there being no merit in this petition, the same deserves to be rejected. Having heard the learned Counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is, whether the decision of the ONGC to pay royalty to the Government of Gujarat on a post-discount price on the premise that if royalty is calculated on pre-discount prices, the amount of royalty would exceed 20% which is a ceiling under Section 6A of the Oilfields Act, could be termed as arbitrary, unreasonable or tenable in law. The Oilfields Act was enacted on 8th September 1948, prior to the commencement of the Constitution of India in 1950. The authority was derived from the Government of India Act, 1935, which held the field at the relevant point of time. The Seventh Schedule to the Government of India Act, List-1, pertains to Federal Legislative List. Entry 36 therein is in the following terms : \"Regulation of mines and oil fields and mineral development to the extent to which such regulation and development under Federal control is declared by Federal law to be expedient in the public interest.\" It corresponds to Entry 53 in the Union List of the Constitution of India which reads thus : \"Regulation and development of oil fields and mineral oils resources; petroleum and petroleum products; other liquids and substances declared by Parliament by law to be dangerously inflammable.\" Page 22 of 43 C/SCA/13943/2011 CAV JUDGEMENT The Preamble to the Oilfields Act indicates that it has been enacted in the public interest to provide for regulation of oilfields and development of mineral oils resources. Section 4 thereof provides that no mining lease shall be valid unless it is in accordance with the rules made under the Act. Section 5 provides that the power to make rules with respect to the mining lease is vested in the Central Government. Section 6 provides that the Central Government may, by notification in the official gazette, make rules for the conservation and development of minerals (this expression was replaced by the expression \"mineral oils\" in 1957). The definition contained in Section 3(c) makes it clear that the expression \"minerals\" (which was subsequently replaced by the expression \"mineral oils in 1957) includes natural gas and petroleum. Before we proceed to answer the question posed by us, it will be profitable to look into the provisions of Section 6A of the Oilfields Act which reads as under : “6A. Royalties in respect of mineral oils.— (1) The holder of a mining lease granted before the commencement of the Oilfields (Regulation and Development) Amendment Act, 1969, shall, notwithstanding anything contained in the instrument of lease or in any law in force at such commencement, pay royalty in respect of any mineral oil mined, quarried, excavated or collected by him from the leased area after such commencement, at the rate for the time being specified in the Schedule in respect of that mineral oil. (2) The holder of a mining lease granted on or after the commencement of the Oilfield (Regulation and Development) Amendment Act, 1969, shall pay Page 23 of 43 C/SCA/13943/2011 CAV JUDGEMENT royalty in respect of any mineral oil mined, quarried, excavated or collected by him from the leased area at the rate for the time being specified in the Schedule in respect of that mineral oil. (3) Notwithstanding anything contained in sub- section (1) or sub-sec.(2), no royalty shall be payable in respect of any crude oil, casing-head condensate or natural gas which is unavoidably lost or is returned to the reservoir or is used for drilling or other operations relating to the production of petroleum, or natural gas, or both. (4) The Central Government may, by notification in the Official Gazette, amend the Schedule so as to enhance or reduce the rate at which royalty shall be payable in respect of any mineral oil with effect from such date as may be specified in the notification : Provided that the Central Government shall not- (a) fix the rate of royalty in respect of any mineral oil so as to exceed twenty percent of the sale price of the mineral oil at the oilfields or the oil well-head, as the case may be, or (b) enhance the rate of royalty in respect of any mineral oil more than once during any period of three years (5) Notwithstanding anything contained in sub- section (4), the Central Government may, by notification in the Official Gazette, amend the Schedule so as to enhance the rate of royalty payable in respect of mineral oil, produced during the period beginning on the 1st day of April, 1990 and ending on the 31st day of March,1993, to 24.52 per cent of the sale price of mineral oil at the oilfields or the oil well- head, as the case may be.” Thus, the intent and purpose of the Oilfields Act is to provide real and reasonable compensation to the State for the crude extracted by the holder of the mining lease. The Page 24 of 43 C/SCA/13943/2011 CAV JUDGEMENT ownership of the crude beneath the land of the State belongs to the State of Gujarat. Sections 69 and 69-A of the Bombay Land Revenue Code, 1879 also recognize the same. The said provision provides that the minerals beneath the land of the State is with the State Government and is the property of the State Government. Therefore, subject to the provisions of the Oilfields Act, the State Government has all the powers necessary for proper enjoyment and disposal of such rights in respect of the minerals. In terms of Section 6A(4), the Central Government is empowered to amend the Schedule to the Act by way of a notification in the official gazette for enhancing or reducing the rate at which the royalty is payable. It further provides that the rate of royalty fixed by the Central Government should not exceed 20% of the sale price of the mineral oil at the oilfields or the oil wellhead, as the case may be. The Central Government has also framed rules called \"The Petroleum and Natural Gas Rules, 1959\" under Sections 5 and 6 of the Oilfields Act. Rule 14 of these Rules pertains to payment of royalty and the relevant portion thereof reads as follows : \"14. Royalty on petroleum and furnishing of returns and particulars: -(1) (a) Notwithstanding anything in any agreement, a lessee shall (i) where the lease has been granted by the Central Government, pay to that Government, and (ii) where the lease has been granted by the State Government, pay to that Government, a royalty in respect of any mineral oil mined, quarried, excavated or collected by him from the leased area at Page 25 of 43 C/SCA/13943/2011 CAV JUDGEMENT the rate specified in schedule of the Act from time to time. The royalty shall be payable on monthly basis, as may be provided for in the lease and shall be paid by the last day of the month succeeding the period in respect of which it is payable. Provided that the Central Government or, as the case may be, the State Government with the approval of the Central Government, may direct that such royalty be paid in petroleum and natural gas; Provided further that such royalty shall not be payable in respect of any crude oil, casing head condensate or natural gas [coal bed methane or gas obtained from gas hydrate] which is unavoidably lost or is returned to the reservoir or is used for drilling or other operations relating to the production of petroleum or natural gas or both. (b) Every lessee shall pay to the State Government, where the lease has been granted by that Government, royalty for the period of lease before the 1st November, 1962, at the rate specified in the lease deed.\" Since we are on the issue of royalty, it would be expedient for better adjudication of the controversy to understand the true meaning of the term \"royalty\". According to unabridged Random House Dictionary, \"royalty\" means \"a compensation or portion of the proceeds paid to the owner of a right, as a patent or oil or mineral right, for the use of it and also an agreed portion of the income from a work paid to its author, composer, etc., usually a percentage of the retail price of each copy sold\". The meaning given to \"royalty\" in Mozley and Whitleys Law Dictionary at page 327, 8th Edition, is \"a pro rata payment to a grower or lessor on the working of the property leased, or otherwise on the profits of the grant or lease, the word is Page 26 of 43 C/SCA/13943/2011 CAV JUDGEMENT specially used in reference to mines, patents and copyrights\". Dealing with royalty, Halsbury, in Halsbury's Laws of England, Vol.26, 3rd Edition, pp.430 and 435, has explained \"royalty\" as \"it is payment to the lessor proportionate to the amount of the demised mineral worked within a certain period\". The Supreme Court, in State of West Bengal v. Kesoram Industries and others, reported in (2004)10 SCC 201, in para 59, has explained the term \"royalty\". \"Royalty\" has been described as \"a share of the product or profit from real property, reserved by the grantor of a mineral lease, in exchange for the lessee's right to mine or drill on the land\". The phrase \"mineral royalty\" has been defined as \"a right to share of income from mineral production\". Thus, the above would show that royalty is a necessary concomitant of mining lease. The origin of the word \"royalty\" is to be found out from the definition itself given in unabridged Random House Dictionary. It is the sovereign power which granted permission to a private person or citizen to use its mine or lands, may be in the beginning. Charging such a person a specific amount for the permission to use such lands or mines owned by the sovereign power which was the royal power, the payment made to such a royal power for the use of the lands or mines for mineral appears to have been named as Royalty. The concept of royalty is to compensate a right of an owner of property who permits or allows others to use his rights from his property. Page 27 of 43 C/SCA/13943/2011 CAV JUDGEMENT It appears from the materials on record that the royalty payable in respect of crude oil in terms of the Schedule to the Act, was fixed by the Central Government at Rs.481/- per MT. However, in the year 1997 a decision was taken by the Central Government to dismantle the \"Administered Price Mechanism\". In view of the dismantling of the Administered Price Mechanism, the Central Government decided to alter the rate of royalty. A committee was appointed by the Central Government, inter alia, for recommending the criteria for determining the royalty on crude oil and also recommending the royalty rate. Such committee was known as the Mauskar Committee. The said Committee prepared and submitted its report on 25th November 2001. In para 6.12.1 of the said report, the Committee held as under : \"6.12.1 According to the National Institution of Public Finance and Policy (NIPFP), Royalty is a return to the owner of land. It is only natural that this return should depend upon the price of oil in case of crude oil. Royalty fixation requires the rationalization of pricing of oil and moving to market determined prices. Crude oil being a largely imported energy resource of the country, the international price of this resource should be taken as the basis for the estimation of royalty as this would reflect the offer price of oil by the consumer in an open market.\" In para 7.4.1 (Conclusion and Recommendations), the Committee has stated that it feels that the market driven price obtained/obtainable by the producers should be considered for Page 28 of 43 C/SCA/13943/2011 CAV JUDGEMENT determining royalty under deregulated price regime. The Committee also made recommendations for determination of wellhead price and the rate of royalty. In para 7.4.7(i), the Committee, inter alia, recommended as under : \"After 1.4.2002 under the deregulated regime the wellhead price as derived from the market driven price obtained/obtainable by the producers based on arm's length transactions in terms of the relevant recommendations be considered for royalty calculations.\" It appears that based on such recommendations of the Mauskar Committee, the Central Government issued a Notification dated 17th March 2003 which, inter alia, provides for payment of royalty for the period after 1st April 2002. This Notification provides for payment of royalty at a rate 20% of the wellhead price till the year 2006-07 and for 'tapering' rates of royalty thereafter. The wellhead price for the onland production was to be derived after deducting 7.5% from the crude oil price. Para 2(vii)(a) of this Notification, dealing with the royalty for the period after 1st April 2002, states as follows : \"The wellhead price of crude oil as derived from the market driven price obtained/obtainable by the producers based on \"arm's length transactions\" will be considered for royalty calculations.\" Para 2(iii) of this Notification referred to above states that \"royalty will be calculated in accordance with the existing Page 29 of 43 C/SCA/13943/2011 CAV JUDGEMENT methodology, i.e. on 'cum royalty' basis\", and a Note-1 at the end of the Notification sets out the following formula as far as the existing methodology for calculation of royalty is concerned : Royalty Amount = Wellhead Price x Royalty Rate 100 + Royalty Rate Section 6A(4) of the Oilfields Act confers powers of delegated legislation upon the Central Government to amend the Schedule of the Act so as to enhance or reduce the rate at which royalty shall be payable. The issuance of Notifications for the purposes of amendment of the Schedule of the Oilfields Act is an act of delegated legislation by the executive and has to be reasonable so as to confirm to the provisions and the intent and purpose of the parent legislation i.e. the Oilfields Act. In our opinion, Section 6A(4) does not confer any power upon the Central Government to mould the provision for the purpose of providing payment of royalty on the post-discount sale prices. To our mind, it would be more reasonable to hold that the twenty percent ceiling must be interpreted with reference to the fair value of the crude at the wellhead i.e. the fair market value and not the discounted price of crude at which ONGC sells to the IOC upon the directions of the Union of India. The phrase \"sale price\" used in the proviso to Section 6A(4) of the Act would only refer to the arm's length market price of crude oil, and not to a discounted price. In our opinion, Page 30 of 43 C/SCA/13943/2011 CAV JUDGEMENT the 'sale price', for the purposes of Section 6A(4), should not mean the discounted price between two companies of the Central Government, especially when the discount is given on the specific instructions of the Central Government for subsidizing the Public Sector Oil Marketing Companies which purchases oil from ONGC. The above is made clear by the Notification dated 17th March 2003, which clearly provides that the wellhead price of the crude oil \"as derived from the market driven price obtained/obtainable by the producers based on arm's length transactions\" will be considered for the purpose of royalty calculations. To put it in other words, the wellhead price to be used for calculation of royalty is the market driven price, based on arm's length transactions, which is obtained or obtainable by the producers. We are in agreement with Mr.Kapadia, the learned counsel appearing for the petitioner, that the use of the words \"market driven price\", \"arm's length transactions\" and \"obtainable\" clearly rule out the discounted price offered by the ONGC to IOCL (both Government companies) on the instructions of the Central Government so far as the calculation of the royalty is concerned. According to 'Black's Law Dictionary', 8th Edition, the phrase \"arm's length\" means, \"of or relating to dealings between two parties who are not related or not on close terms and who are presumed to have roughly equal bargaining power...\". In the 'Advanced Law Lexicon' by Ramanatha Aiyar, the Page 31 of 43 C/SCA/13943/2011 CAV JUDGEMENT phrase \"arm's length\" is defined as \"...a transaction negotiated and entered into by unrelated parties, each of whom acts in his or her own best interest using fair market values\", and the phrase \"arm's length price\" is defined as \"the price at which a willing seller and an unrelated willing buyer will freely agree a transaction\". The communications dated 30th October 2003 and 28th March 2008 of the Central Government which are on record are in tune with such position and expressly state that the discounts offered by the ONGC would not affect the royalty payable to the State Government. As observed earlier, the above position has been accepted by the Central Government and the ONGC, and the ONGC has accordingly paid royalty to the State of Gujarat on the basis of the wellhead price calculated using the pre- discount price of the crude oil, without demur, till the year 2007. From the materials on record, it also appears that none of the Notifications issued by the Central Government under the Act expressly or impliedly overrides the decision contained in the Notification dated 17th March 2003 or states that any discount offered by the ONGC to its buyers shall be taken into account for the purpose of determination of the wellhead price and the calculation of the royalty. We find merit in the submission of Mr.Kapadia that if the Central Government wanted to alter the method of calculation of royalty and thereby introduce the post-discount price of Page 32 of 43 C/SCA/13943/2011 CAV JUDGEMENT ONGC for such purpose, then it would be necessary to issue a notification to this effect in terms of Section 6A(4) of the Oilfields Act and amend the Schedule to the Act. Such is not the position and the Central Government appears to have just addressed a letter in that regard, which runs contrary to the Notification, which still holds the field. Mr.Kapadia is also right in submitting that even if the Central Government comes out with a notification for amending the Schedule for providing calculation on post- discount prices, the same would be arbitrary and unreasonable, and violative of Article 14 of the Constitution of India. We have gone through the table of discounts produced on record indicating that the discounts directed by the Central Government reach as high as upto 95% to 96% which reduces the royalty amount of the State Government to nearly Nil. It appears from the table that in the month of September, 2008 the royalty which was calculated by the ONGC was in the negative. The table also indicates that the discounts directed by the Central Government are on an average roughly over 70%. This reduces the royalty amount payable to the State to a meager sum and frustrates the very intent and purpose of the Oilfields Act which is to reimburse the State on a reasonable basis in respect of the crude which is extracted by the mining lease-holder i.e. the ONGC. Page 33 of 43 C/SCA/13943/2011 CAV JUDGEMENT Page 34 of 43 Details of short fall in royalty payment made by ONGC (2009-2010) Due Date 1 2 3 4 5 6 7 8 9 10 Apr-09 480456.62 1261423912 31.5.2009 1119950696 30.5.2009 1216964612 141473216 791 48287909.4 May-09 465199.19 1395421514 30.6.2209 1151627787 30.6.2009 1352764242 243793727 761 80056182.56 June-09 406030.01 1442864225 31.7.2009 1545385287 31.7.2009 1405487593 -102521062 0 Jul-09 475147.88 1623953885 31.8.2009 1682051157 31.8.2009 1234946226 -58097272 0 Aug-09 453128.66 1747533346 30.9.2009 1557856367 29.9.2009 1376011291 189676979 669 54755586.53 462088.98 1654930720 31.10.2009 647012727 30.10.2009 1276456918 1007917993 638 277481204.2 Oct-09 455583.73 1631314714 30.11.2009 1257987369 30.11.2009 1257984070 373327345 608 97944730.29 Nov -09 460726.20 1700718929 31.12.2009 1323937536 31.12.2009 1323933394 376781393 577 93810824.77 Dec-09 419296.50 1737246705 31.1.2010 1224005078 31.1.09 1075529773 513241627 546 120921133.5 J an-10 481414.77 1843397356 28.2.2010 1124005078 28.2.09 1011660926 719392278 518 160798956.2 Feb-10 433236.70 1598520814 31.3.2010 1139925762 31.3.09 851039312 458595052 487 96370923.22 Mar-10 479420.50 1856783525 30.4.2010 1194430040 30.4.09 1027184110 662353485 457 130615199.9 TOTAL 19494109645 4525934761 1161042651 Grand Total (Shortfall + Penalty) Rs. In Cr. 568.70 Production Month Production Quantity (MT) Royally amount Payable as per ORD ACT (in Rs.) Actual Royalty paid (in Rs.) Actual Royalty payment Date Royalty calculation at discounted rate Shortfall in Royalty (in Rs.) Delayed period (in days)as on 30.4.11 Penalty as per PNG Rule 23(1) (in Rs.) Sep-09 Details of short fall in royalty payment made by ONGC (2008-09) Due Date 1 2 3 4 5 6 7 8 9 10 Apr-08 483068.12 2310000000 31.5.2008 938017243 7.7.2008 312963231 1371982757 1156 684375070 May-08 471373.86 2698475712 30.6.2008 542201939 7.7,2008 752074402 2156273773 1126 1047683212 Jun-08 456658.07 2863302907 31.7.2008 564995933 31.7.2008 981301554 2298306974 1095 1085950045 462140.65 2935626687 31.8.2008 1225336304 30,8.08 571439862 1710290383 1064 785234143,5 Aug-08 461013.88 2521857985 30.9.2008 1027601089 30.9.08 165241804 1494256896 1034 666704676.2 440906.90 2229570700 31.10.2008 0 -12393281 2239570700 1003 969289266.9 Oct-08 458594.15 1833955277 30.11.2008 0 982593534 1833955277 973 769997426.3 Nov-08 442781.76 1249809600 31.12.2008 0 427830840 1249809600 942 508021921.4 Dec-08 471226.40 988800000 31.1.2009 11785419 31.1.09 130015452 977014581 911 384067108.5 Jan-09 424403.19 931034532 28.2.2009 901382963 28.2.09 901072681 29651569 883 11297857.07 Feb-09 408888.51 932643524 31.3.2009 939210679 31.3.09 903827509 -6567155 0 War-09 470635.26 1184251878 30.4.2009 1262673625 30.4.09 1184251878 -78421747 0 TOTAL 22689328802 7413205194 7300219466 15276123608 6912620729 Note : As per PNG Rule 23(1) SBI PLR 13.75% as on 31.7.2011 is considered for royalty calculation. Penalty calculation w ould vary depending upon delayed period and penalty rate. Production Month Production Quantity (MT) Royalty amount Payable as per ORD ACT (in Rs.) Actual Royalty paid (in Rs.) Actual Royalty payment Date Royalty calculation at discounted rate Short fall in Royalty (in Rs.) Delayed period (in days) as on 31.7.11 Penalty as per PNG Rule 23(1) (in Rs.) JuI-08 Sep-08 Grand Total (Shortfall + Penalty) Rs.in Cr. 2218.87 Details of short fall in royalty payment made by ONGC (20010-2011) Due Date 1 2 3 4 5 6 7 8 9 10 Apr-10 428914.40 1731351249 31.5.2010 612096138 30.5.2010 808538573 1119255111 426 205743621 May-10 443371.60 1639947772 30.6.2010 1124042384 30.6.2010 686302550 515905388 396 88156216.57 Jun-10 439071.40 1653299431 31.7.2010 0 706425276 1653299431 365 260394660.4 Jul-10 472227.53 1809073252 31.8.2010 983735574 31.8.2010 1266741884 825337678 334 118950379.6 Aug-10 460538.36 1792234749 31.9.2010 1217966257 29.9.2010 1263117800 574268492 304 75331439.44 453270.78 1747301148 31.10.2010 1326820160 29.10.10 1223931871 420480988 273 49533236.39 Oct-10 467321.26 1831739705 30.11.2010 1250279938 30.11.2010 972174866 581459767 243 60969640.91 Nov-10 439504.69 1806654489 31.12.2010 1222859108 31.12.2010 997597617 583795381 212 53405281.57 Dec-10 439279.41 1942597553 31.1.2011 628660805 31.1.2011 1132027273 1313936748 181 102622059.8 Jan-11 445755.49 2090364827 28.2.2011 1141301922 28.2.2011 46078874 949062905 153 62657653.02 Feb-11 400281.67 2048619894 31.3.2011 1127890349 31.3.2011 40900120 920729545 122 48470734.81 Mar-11 458555.13 2584906470 30.4.2011 1532243732 30.4.2011 47059027 1052662738 92 41789268.69 TOTAL 22678090539 12167896367 9190895731 10510194172 798109553 Production Month Production Quantity (MT) Royalty amount Payable as per ORD ACT (in Rs.) Actual Royalty paid (in Rs.) Actual Royalty payment Date Royalty calculation at discounted rate Short fall in Royalty (in Rs.) Delayed period (in days) as on 30.4.11 Penalty as per PNG Rule 23(1) (in Rs.) Sep-10 C/SCA/13943/2011 CAV JUDGEMENT Details of shortfall of royalty and penalty to be recovered from ONGC Monthwise details of discounted sales price Month Pre-discount price Rs./bbl Post-discount price Rs./bbl Discount Rs./bbl Discount % 'Jan-11 4495.244 270.00 4225.20 94.0% 'Feb-11 4824.000 270.00 4554.00 94.0% 'Mar-11 5332.100 270.00 5062.13 95.0% 'Apr-11 5475.400 1501.20 3974.23 73.0% 'May-11 5129.400 1155.20 3974.23 77.0% 'Jun-11 5224.000 1249.80 3974.23 76.0% 'Jul-11 5277.800 3239.60 2038.23 39.0% 'Aug-11 5138.600 3100.30 2038.23 40.0% 'Sep-11 5462.600 3424.40 2038.23 37.0% 'Oct-11 5471.100 277.70 5193.38 94.9% 'Nov-11 5638.300 262.80 5375.48 95.3% 'Dec-11 5751.722 2536.90 3214.83 55.9% Page 35 of 43 Details of shortfall in royalty payment made by ONGC (2011-2012) Due Date 1 2 3 4 5 6 7 8 9 10 Apr-11 450088.22 2681579195 31.5.2011 0 691143654 2681579195 61 66102763.85 May-11 469833.87 2618114374 30.6.2011 0 540218051 2618114374 31 32798158.84 Jun-11 463051.72 2599932371 31.7.2011 0 551881598 2599932371 0 0 TOTAL 7899625940 0 1783243303 7899625940 98900923 Note : As per PNG Rule 23(1) SBI PLR 13.75% as on 31.7.2011 is considered for royalty calculation. Penalty calculation would vary depending upon delayed period and penalty rate. Production Month Production Quantity (MT) Royally amount Payable as per ORD ACT (in Rs.) Actual Royalty paid (in Rs.) Actual Royalty payment Date Royalty calculation at discounted rate Short fall in Royalty (in Rs.) Delayed period (in days) as on 30.4.11 Penalty as per PNG Rule 23(1) (in Rs.) Grand Total (Shortfall + penalty) Rs. In Cr 799.85 Details Total (in Rs.) 0 166621599.2 166621599.2 15276123608 6912620729 22188744337 4525934761 1161042651 5686977412 10510194172 798109553 11308303725 7899625940 98900923 7998526863 Grand Total 38211878481 9137295455 47349173936 Shortfall in payment of royalty (in Rs.) Penalty for the delayed period (in Rs.) as per PNG Rule 23{ 1) Payment of royalty for February, March & April 2008 paid in J uly 2008 shortfall of payment of royalty for period April 2008 - March 2009 shortfall of payment of royalty for period April 2009- March 2010 shortfall of payment of royalty for period April 2010-March 2011 shortfall of payment of royalty for period April 2011 - J une 2011 C/SCA/13943/2011 CAV JUDGEMENT 'Jan-12 6022.330 605.55 5416.78 90.0% 'Feb-12 6054.000 1694.56 4359.44 72.0% 'Mar-12 6471.400 6471.40 000.00 .0% 'Apr-12 6391.188 2642.86 3748.33 59.0% 'May-12 6289.106 2540.78 3748.33 60.0% 'Jun-12 5679.820 1931.49 3748.33 66.0% 'Jul-12 5680.270 888.31 4791.96 84.0% 'Aug-12 6183.250 799.18 5384.07 87.0% 'Sep-12 6037.970 1919.84 4118.13 68.0% 'Oct-12 5700.530 650.00 5050.53 89.0% 'Nov-12 5768.404 650.00 5118.40 89.0% 'Dec-12 5811.372 3846.92 1964.45 34.0% 'Jan-13 5998.590 650.00 5348.59 89.0% 'Feb-13 6087.057 650.00 5437.06 89.0% 'Mar-13 5957.159 4529.16 1428.00 24.0% We are also of the opinion that any discount offered by the ONGC to its buyer viz. IOCL etc. cannot be at the cost of the lessor State Government and should not be taken into account for the purpose of determination of the wellhead price and for the calculation of the royalty. The ONGC and IOCL respectively are both Central Government Public Sector Undertakings controlled by the Union of India. Both the PSUs are bound by the directives of the Union of India. For the purpose of compensating the under recoveries by the downstream public sector marketing companies (such as IOC, BPCL and HPCL), the Union of India through its Petroleum Planning and Analysis Sale issues directions for each quarter in respect of the discount to be given so far as the sale of crude by the upstream Oil companies viz. ONGC and Oil India Ltd. is concerned. Mr.Kapadia, the learned Counsel appearing for the petitioner is quite justified in submitting that the subsidy on Page 36 of 43 C/SCA/13943/2011 CAV JUDGEMENT the petroleum product given by the Central Government and the discounts directed to be given in respect of sale of crude by the ONGC to the downstream companies of the Central Government, is an internal matter between the Union of India and the Upstream and Downstream companies which are the Central Government PSUs. The State Government has nothing to do with the same. Mr.Kapadia is also right in submitting that the discounts directed to be given by the Central Government between its PSUs should not affect the amount of royalty that is rightfully recoverable by the State of Gujarat under the provisions of Oilfields Act. In our opinion, if the Notification dated 20th August 2007 is construed so as to make the royalty payable on a post- discount sale price, the same would be without competence and violative of Article-14 of the Constitution of India. If the phrase “sale price of crude oil” is construed to mean the post- discount price, the statutory right of the State to be compensated for the crude extracted would surely stand frustrated and there being no lower limit prescribed for the discount the royalty payable to the State would be reduced to near zero. Therefore, the phrase “sale price of crude oil” used in the Notification dated 20th August 2007 should be construed as referring to a pre-discount sale price and not the post-discount sale price. Over and above the Note-1 appears to be only to substitute the deduction of fixed amount of Rs.1251/- as a wellhead cost for determining the wellhead price instead of deducting the percentage amount of the price of the crude earlier provided at 7.5%. The said note does not change the methodology of making royalty payable on the post-discount sale price instead of pre-discount sale price. Page 37 of 43 C/SCA/13943/2011 CAV JUDGEMENT We have taken note of the fact that even after the Notification dated 20th August 2007 the royalty was being paid by the ONGC on the basis of the well-head price calculated using the pre-discount price of the crude. It is for the first time vide letter dated 20th August 2008 that the ONGC took a stance that the royalty would be calculated on the basis of a post-discount price of crude oil since the royalty amount would otherwise exceed the statutory selling of 20% of the ONGC’s sale price. Even at that relevant point of time it was neither the stance of the Union of India nor of the ONGC that the royalty payment was required to be made on the basis of post- discount price of crude oil on account of the provisions of the Notification dated 20th August 2007 and the consequent amendment to the Schedule of the Oilfields Act. It is well settled that where the language of a statute, in its ordinary meaning and grammatical construction, leads to a manifest contradiction of the apparent purpose of the enactment, or to some inconvenience or absurdity, hardship or injustice, presumably not intended, a construction may be put upon it which modifies the meaning of the words, and even the structure of the sentence. Where the main object and intention of a statute are clear, it must not be reduced to a nullity by the draftsman's unskillfulness or ignorance of the law, except in a case of necessity, or the absolute intractability of the language used. (see Maxwell on Statutes (10th Edition) page 229) As held by the Supreme Court in Directorate of Enforcement v. Deepak Mahajan and another, reported in AIR 1994 SC 1775, normally courts should be slow to pronounce Page 38 of 43 C/SCA/13943/2011 CAV JUDGEMENT the legislature to have been mistaken in its constantly manifested opinion upon a matter resting wholly within its will and take its plain ordinary grammatical meaning of the words of the enactment as affording the best guide, but to winch up the legislative intent, it is permissible for Courts to take into account of the ostensible purpose and object and the real legislative intent. Otherwise, a bare mechanical interpretation of the words and application of the legislative intent devoid of concept of purpose and object will render the legislature inane. In Directorate of Enforcement (supra), the Supreme Court was considering the provisions of the Foreign Exchange Regulation Act. While interpreting the words “person arrested” in context with Section 167(1) and (2) of the Code of Criminal Procedure, 1974, the Court held that it is permissible for Courts to have functional approaches and look into the legislative intention and sometimes may be even necessary to go behind the words and enactment and take other factors into consideration to give effect to the legislative intention and to the purpose and spirit of the enactment so that no absurdity or practical inconvenience may result and the legislative exercise and its scope and object may not become futile. In Commissioner of Income Tax, Dehradun and another v. Enron Oil and Gas India Limited, reported in (2008)15 SCC 33, the question which arose before the Supreme Court was, whether the loss arising on account of foreign currency translation was allowable as deduction or not and conversely whether the gains on account of foreign currency translation were to be treated as a receipt liable to tax. While answering the said question in the affirmative and dismissing the appeal Page 39 of 43 C/SCA/13943/2011 CAV JUDGEMENT filed by the Commissioner of Income Tax, Dehradun, the Court made the following observations in paras 13, 14, 36 and 37 as under : “13. Section 42 is a special provision applicable to oil contracts. It has to be construed in the background of PSC. There is a difference between production sharing contracts and revenue sharing contracts. PSCs were put in place in order to enable the sovereign governments to maximise their gains from oil exploration by private corporations. PSC is a regime. 14. Prior to the PSC regime, the Governments recovered royalty and imposed tax on revenues from oil exploration. However, in countries like India, where there is a great demand for oil, PSC was devised to give the Governments a stake in oil exploration and development, virtually making it a partner in the process. 36. To answer this question, we were required to understand the subject of a production sharing contract (PSC). The State hires the investor(s) as a contractor(s) for the conduct of work connected with the extraction of minerals. The subsoil belongs to the State. It has a monopoly over the use of the subsoil and the removal from it of all natural resources. Under PSC the State grants to the contractor (investor) exclusive rights to conduct activity of exploration envisaged by the contract. A PSC is a civil law contract. The contractor (investor) carries out the activities envisaged in the contract (prospecting, search, exploration, extraction, etc.) at this own expense and risk. The State does not bear any expenses or risks. If the investor invests in the prospecting and exploration but does not discover any oil, the expended funds are not refundable unless the contract provides otherwise. The State hires the investor as a contractor to perform work for it, but at the expense and risk of the investor. The said work is carried out on a compensated basis, with the State paying the investor not in money, but in terms of a portion of the produced product (oil). This is called as production sharing. 37. There are two main systems around the world: royalty/tax systems or production sharing systems. PSCs Page 40 of 43 C/SCA/13943/2011 CAV JUDGEMENT have become the fiscal system of choice for most countries. Taxes are embedded in the Government's share of profit oil. PSC is a complex system. In it, the foreign company provides the capital investment in exploration, drilling and construction of infrastructure. The first proportion of oil extracted is allocated to the company, which uses oil sales to recoup its costs and capital investment. The oil used for this purpose, namely, to recoup capital investment and cost is termed as “cost oil”. Once costs have been recovered, the remaining “profit oil” is divided between the State and the company in agreed proportions. The company is taxed on its profit oil. Sometimes, the State participates either itself or through its nominee as a commercial partner in the contract, operating in joint venture with foreign oil companies. In such cases, the State provides its percentage share of capital investment, and directly receives the percentage share of cost oil and profit oil.” From the aforesaid observations of the Supreme Court, it is very clear that the subsoil belongs to the State and has a monopoly over the use of the subsoil and the removal from it of all natural resources. Having given our thoughtful consideration to the entire matter, we are of the opinion that instead of declaring the Notification dated 20th August 2007, more particularly, the Note-1 thereof as ultra vires Article 14 of the Constitution of India, it will be more reasonable to read down the Notification, more particularly, the phrase “sale price of crude oil” used in Note-1 of the Notification dated 20th August 2007 in the manner to make it more meaningful and purposeful. We direct that the phrase “sale price of crude oil” used in the Note-1 of the Notification dated 20th August 2007 and the Schedule of the Oilfields (Regulation & Development) Act, Page 41 of 43 C/SCA/13943/2011 CAV JUDGEMENT 1948 should be read as one referring to a pre-discount sale price and not the post-discount sale price and that the royalty amount should be calculated and paid on the basis of the pre- discount sale price of crude oil. We direct the ONGC to make the payment towards the amount of shortfall of royalty for the period between April 2008 till this date, within a period of two months from today. The petition is allowed to the aforesaid extent. However, in the facts and circumstances of the case, there shall be no order as to costs. (BHASKAR BHATTACHARYA, CJ.) (J.B.PARDIWALA, J.) FURTHER ORDER After this order is passed, Mr Mehta appearing on behalf of the ONGC prays for stay of operation of our order. In view of what has been stated above, we find no reason to stay our order as we have already given two months' time for making the payment. (BHASKAR BHATTACHARYA, CJ.) (J.B.PARDIWALA, J.) Page 42 of 43 C/SCA/13943/2011 CAV JUDGEMENT /Moin Page 43 of 43 "