SCA/3348/2001 1/100 JUDGMENT IN THE HIGH COURT OF GUJARAT AT AHMEDABAD SPECIAL CIVIL APPLICATION No. 3348 of 2001 HON'BLE MR JUSTICE KS JHAVERI ============================================================== 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 ? ============================================================== ESSAR STEEL LTD & Others - Petitioner(s) Versus UNION OF INDIA, THROUGH SECRETARY & Others - Respondent(s) ============================================================== Appearance : Mr. K.S. Nanavati, Senior Advocate with Mr. S.N. Thakkar, Kunal K. Nanavati, Advocates for M/s Nanavati Associates for Petitioners. Mr Jitendra Malkan, Assistant Solicitor General of India with Mrs Vasavadatta Bhatt for Respondent no.1. Mr. Kartikeya Thakar for M/s Trivedi & Gupta for respondent no.2. Mr. Dushyant A. Dave, Senior Advocate with Mr. S.S. Panesar for respondent nos.3, 4 and 5. ================================================================ CORAM : HON'BLE MR JUSTICE KS JHAVERI Date :11 /10/2005 CAV JUDGEMENT SCA/3348/2001 2/100 JUDGMENT 1.0 While dealing with the diverse contentions raised by the parties in the petition, the consequential issues which arose for consideration of this Court are (i) whether a government monopolistic company established with the object of accelerating the growth of national economy should concentrate on profit motive alone in the course of discharge of its functions, and (ii) whether such a company has the authority to deviate from the directions issued by the Central Government in policy matters and act arbitrarily and unreasonably for the sole purpose of making super profit. 2.0 The petitioner Essar Steel Limited has prayed for quashing and setting aside notice dated 1.5. 2001 whereby the respondent nos.3 to 5 have sought disconnection of supply of gas for non-payment of transportation charges; to restrain the respondents, their officers, servants from acting in any manner contrary to the Government pricing orders dated 31.12.1991, 18.9.1997 and 30.9.1997; to direct the respondents to implement orders dated 21.5.1999 and 5.7.1999 issued by the respondent no.1 pursuant to the recommendations dated 5.4.1999 tendered by the Committee constituted by the respondent no.1 and to issue revised invoices in consonance with the said orders; to hold and declare that the petitioner company is not liable to pay the transportation charges or the price for supply of gas along the Ex-HBJ pipeline and to hold and declare that the respondent nos.3 to 5 are not entitled to charge any price or charges contrary to the pricing orders issued by the respondent no.1. from time to time. SCA/3348/2001 3/100 JUDGMENT 3.0 To decide the controversies raised in this petition it is necessary to set out the facts which led to the filing of the present petition as under: 3.1 The petitioner M/s Essar Steel Limited is a public limited company incorporated and registered under the provisions of the Indian Companies act, 1956, which is engaged in the business of production of sponge iron and steel at Surat. At that time vide allocation letter dated 10.10.1986 the petitioner was allotted 0.50 MMSCMD of gas on firm basis. Thereafter vide allocation letter dated 6.8.87 the petitioner was alloted 0.35 MMSCMD of gas on fall back basis. The steel complex was set up in the year 1989-90 solely for the reason that natural gas was available in abundance at Hazira and most of the gas had remained unutilized on account of lack of the requisite demand. The petition company therefore set up the aforesaid steel complex at Hazira at an infrastructural costs of Rs.6000 crores as it appears that there was an assurance from the ONGC/Government of India that the price for supply of gas would be such price as may be fixed by the Government of India from time to time. According to the petitioner, it is on the aforesaid assurance that the petitioner has invested the aforesaid amount and approximately 10000 people depend on the petitioner company for their livelihood on account of the direct/indirect employment as well as in the ancillary activities. 3.2 Respondent no.1 is Central Government i.e. Department of Petroleum and Natural Gas (hereinafter referred to as MoPNG) which controls the respondent no.2 Oil and Natural Gas Corporation Limited (hereinafter referred to as ONGC) is incorporated under the ONGC Act in 1958. SCA/3348/2001 4/100 JUDGMENT 3.3 Respondent no.3 is Gas Authority of India Limited (hereinafter referred to as GAIL) which is incorporated for the purpose of transportation and marketing of natural gas, and respondent nos.4 and 5 are officers of respondent no.3. GAIL was established by the Government of India for handling diverse post exploration and production activities relating to Natural Gas viz. Transportation, processing, distribution and marketing of gas and its fractions and by-products. It enjoys a dominant position in the transmission and marketing of gas. GAIL handles about 95% of the gas business in India and has substantial investment in the gas transmission and processing facilities to accommodate all the projected increase in gas production. It has demonstrated strong management capabilities. GAIL has a corporate mission of accelerating and optimizing the effective and economic use of Natural Gas and its fractions to the benefit of national economy. It has commissioned Hazira-Bijapur-Jagdishpur pipeline (HBJ pipeline), which linked Western India to central and northern India. In 1991, GAIL constructed its first LPG plant at Bijapur and in 1992 took over ONGC/s gas distribution pipelines. GAIL sources 90% of its natural gas requirements from ONGC and the balance from OIL. GAIL's pricing is based on actual cost of gas plus its transportation charges. 3.4 In view of the decision of the Central Government to divert the activities of the respondent no.2-ONGC, and respondent no.2 to concentrate only on production of natural gas, respondent no.1 formed “Gas Linkage Committee” (hereinafter referred to as GLC), which is an inter ministerial committee to decide allocation of gas. The gas produced by ONGCL & and JV consortiums is marketed by GAIL. The gas SCA/3348/2001 5/100 JUDGMENT produced by OIL is marketed by OIL itself, except in Rajasthan where GAIL is marketing its gas. Gas is allocated to consumers by this Ministry on the recommendations of Gas Linkage Committee which is an inter-Ministerial Committee with representatives from the Planning Commission and the Ministers of Finance, Power, Chemicals & Fertilizers and Steel. Prior to 1986 the respondent no.2 was deciding the price of natural gas and there were serious discrepancies in price and there was discriminatory treatment to the consumers. In that view of the matter the respondent no.1 decided to have a fixed price of natural gas. By circular dated 30.1.1987, the price of gas was fixed by the Ministry of Petroleum and Natural Gas, which price was exclusive of royalty, taxes, duties and other statutory levies and the said price was made effective immediately. 3.5 A contract was entered into between the petitioner and the respondent no.2 on 24.1.1990, at the price fixed under price order of 1987, for supply of (i) 0.50 MMSCMD of gas on firm basis and (ii) 0.35 MMSCMD of gas on fall back basis i.e. as and when available for a period of 10 years. The quantity, period of contract, price and other particulars are part of the agreement which was produced at Annexure-A to the petition. “Firm basis” would mean that the supply of gas would be regular and “fallback” would mean that the supply of gas would be as and when available. On 2.6.1990 the respondent no.2 addressed a communication to the petitioner stating therein that there was no surplus gas available which could be supplied on fallback basis, but if the petitioner requires quantity of gas more than 0.35 MMSCMD, the respondent may try to meet the demand by opening free gas wells and that would be possible only if the petitioner was ready to pay full price of gas for the gas upto 0.50 SCA/3348/2001 6/100 JUDGMENT MMSCMD. In response to the said communication the petitioner replied that the petitioner did require gas much in excess of 0.50 MMSCMD and that if the respondent Corporation was not in a position to supply the additional quantities on fallback basis, it will have no alternative but to take additional quantity at the full rate and therefore ONGC may continue to supply additional quantity and charge full rate. In view of the request of the petitioner, the respondent no.2 made special arrangements and completed the formalities to supply additional quantity of gas to the petitioner. 3.6 By letter dated 20.8.1990 addressed to respondent no.2 ONGC the petitioner informed them that there is a definite commitment from Ministry of Petroleum and Natural Gas for supply of additional quantity of 0.35 MMSCMD on fallback basis. In response to the said communication, the respondent no.2, by their letter dated 30.8.1990, pointed out that as special arrangements were made to give additional gas, the petitioner is required to make payment as per the invoice. On 4.9.1990 the petitioner was allocated 0.90 MMSCMD gas on firm basis. The petitioner wrote letter dated 6.10.1990 to respondent no.2 confirming that they are willing to pay the committed price for the entire quantity. Since the petitioner was in need of further supply of 0.90 MMSCMD gas on firm basis, an agreement was executed on 20.8.1991 between the petitioner and the respondent no.2, by way of amendment of the earlier agreement dated 24.1.1990 for additional supply of 0.90 MMSCMD gas on firm basis. The additional supply was for the export oriented unit of the petitioner. The said agreement provided that the price of gas shall be as per decision of Government of India from time to time. In view of this the fallback basis allotment of SCA/3348/2001 7/100 JUDGMENT 0.35 under the agreement dated 24.1.1990 was cancelled and the total quantity 0.50 (domestic) + 0.90 (EOU) was on firm basis. Any additional quantity over and above this was at the same price. The amended Annexure-II reads as under: “Price of Gas: (i) The price of GAS shall be as per decision of the Government of India from time to time. Till decision of the Government is received, the Buyer shall pay at the rate of Rupees One Thousand Four Hundred only (Rs.1400/-) per One Thousand (1000) standard cub meters of gas which shall be adjusted on receipt of Government of India's decision in this behalf. This price shall be charged for the entire quantity of gas to be supplied under this Contract including in excess of 14,00,000 M3/day.” 3.7 The Government of India issued price order No.L-12015/2/88-GP, dated 31.12.1991 wherein it revised the price of natural gas with effect from 1.1.1992. The relevant clauses are as under: “(i) The price of onshore gas and for offshore gas at landfall point, will be Rs.1550/1000 cu. mts. (ii) The above prices would be raised by Rs.100/1000 cu. Mts. At the end of each year for a period of three years, that is, the prices of onshore gas and offshore gas at landfall points, would be Rs.1650/1000 cu. mts. With effect from 1.1.1993, Rs.1750/1000 cu. mts. With effect from 1.1.1994 and Rs.1850/1000 cu. mts. With effect from 1.1.1995. (iii) Along the HBJ pipeline, the price of natural gas would correspondingly be Rs.2400/1000 cu. mts. w.e.f. 1.1.1992, and Rs.2500, Rs.2600 and Rs.2700 with effect from 1.1.1993, 1.1.1994 and 1.1.1995 respectively.” 3.8 ONGC, under instructions of Government of India, transferred its gas marketing function to GAIL on 16.5.1992 on the same terms and conditions. GAIL is entrusted with the function of transporting, supplying and marketing gas by Government of India. However, Gas Linkage Committee is the authority to decide the allocation as well as quantity of gas to be supplied to various consumers. SCA/3348/2001 8/100 JUDGMENT 3.9 A contract was entered into between the parties on 1.1.1993 wherein Article 10.04 reads as under: “10.04 The price of Gas in Article 10.01(1) & 10.01(b) and 10.2 above is exclusive of Service Charges, Royalty, Taxes, Duties and all other statutory levies as applicable at present or to be levied in future by the Central or State Government or Municipality or any other local body or bodies payable on sale of GAS from ONGC to SELLER, or on sale of GAS from SELLER to the BUYER which shall be borne by the BUYER over and above the aforesaid price. 3.10 A fresh contract for supply of 0.90 MMSCMD for EOU project between the petitioner company and GAIL was entered into by replacing the original contract dated 20.8.1991 with ONGC. The new contract also provided that the price of 1000 SCM shall be as per the Government of India Pricing Order dated 31.12.1991 and that GAIL shall have the right to revise the price of gas as per directives, instructions, orders, etc. of Government of India. Under this contract GAIL has been recovering metering charges at Rs.20/- per 1000 SCM only in respect of the quantity supplied under this contract, which is not permitted under various Government Pricing Orders. The allegation is that no such metering charges are recovered from any other consumers or even in case of petitioner company in respect of other quantities. All the contracts whether with ONGC or with GAIL, specifically declare that the price for supply of gas would be as per the directions, instructions, orders, etc. of Government of India as may be issued from time to time. 3.11 In January 1995 the Government of India set up a committee under the Chairmanship of Mr.T.L. Shankar to review the entire question of natural gas SCA/3348/2001 9/100 JUDGMENT pricing. It is required to be noted that right from 1993, due to the requirement of natural gas, the petitioner had always requested for conversion of 0.35 MMSCMD from fallback to firm basis and for allocation for petitioner’s power plant. Allocation was made to the petitioner as well as to VMC, GNVFC, IPCL and GSFC who are equated with HBJ pipeline consumers and the said consumers are not taking their gas through their own pipeline, whereas the petitioner is taking gas from landfall point and from that the gas is transported to the factory in their own pipeline. GAIL has written letter dated 14.3.1997 to Ministry of Petroleum and Natural Gas stating that the GAIL has converted allocation of 0.35 of MMSCMD of the petitioner company from fallback to firm allocation, but no further gas is available to consider allotment for power plant and that even excess gas which is available due to offshore fields would also be for limited period. 3.12 The petitioner company has written letter dated 8.2.1996 to GAIL wherein, while referring to two pending issues of firming up of fallback allocation (0.35 MMSCMD) and allocation of gas to 515 MW power plant, the petitioner company stated that the petitioner company had been advised by one of the consumers viz. NTPC for their Kawas project that they are agreeable to pay higher price to GAIL for supply of gas to them at Hazira, on the basis of Ex-HBJ pipeline price and that the petitioner has been advised that they should agree to pay the same price for the above two prices. It was further stated that the petitioner came to know that Government of India has appointed a committee under Shri T.L. Shankar, to review the prices of gas to the industrial consumers. The petitioner company has therefore stated that looking to the critical position they are placed in and keeping in mind the SCA/3348/2001 10/100 JUDGMENT urgent need for the above issues to be resolved, and as advised by their client, the petitioner company agrees to pay the price on similar terms and conditions pending finalization and implementation of Shanker Committee’s recommendation as would be applicable to all users of natural gas. The petitioner company specifically mentioned in the said letter that such supply shall be at the “HBJ price” till such time the new price order was issued by the Government of India. 3.13 The minutes of Gas Linkage Committee held on 28.3.1996 observed as under: “... GLC noted that there has been substantial improvement in the supply of gas to Hazira and the HBJ following the commissioning the second Bassein-Hazira pipeline ... The diversity factor is not likely to exceed 12.5% (which is considered acceptable) even after fallback allocations are firmed up. ...” Accordingly GLC approved the conversion of following fallback allocations into firm allocations: 1. IPCL : 09 MMSCMD 2. GSFC : 0.45 MMSCMD 3. ESSAR, Gujarat : 0.35 MMSCMD 3.14 The Committee in its meeting held on 16.4.1996 with regard to agenda item no.6 held as under: “GLC considered the proposal for converting the falback allocations in favur of IPCL, GSFC and Essar, Gujarat into firm allocations. GLC noted that there has been a substantial improvement in the supply of gas to Hazira and the HBJ following the commissioning of the Second Bassein-Hazira pipeline. In terms of the present projections of demand and availability, the diversity factor is not likely to exceed SCA/3348/2001 11/100 JUDGMENT 12.5% (which is considered acceptable) even after the fallaback allocations are firmed up. GLC also noted that the respective administrative Ministries have recommended the long standing demands of these units for the conversion of their fallback allocations into firm allocations.” In the year 1997-98 the allocation of gas was 1.20 MMSCMD which was as per Ministry's advice to avoid flaring up of gas. Thereafter the Government of India vide its order dated 20.5.1996 approved the allocation of 0.35 MMSCMD from fallback allocation to a firm allocation in view of the improved position of supplies and directed the petitioner company to enter into an amended contract accordingly with GAIL within 60 days from the issuance of the order. In pursuance of the same a supplementary agreement was entered into between the petitioner company and GAIL for conversion of 0.35 MMSCMD from fallback allocation to firm basis. 3.15 The said contract came into force with effect from 11.7.1996. Article nos.5.01 and 5.02 were deleted and were replaced by Articles 5.01 and 5.02. Article 11.01, 11.02 and 11.03 and Annexure-II of the existing contract stood deleted and were replaced by new Article 11.01 which reads as under: “The buyer shall pay to the seller the present price of 1000 (One thousand) Standard Cubic Meters of Gas as per Government Pricing Order No.L-12015/2/88-GP dated 31.12.1991 for 0.50 (Zero Point Five Zero) Million Standard Cubic Meters per day of gas. The buyer has further agreed to and shall pay for supply of Gas in excess of 0.50 (Zero point Five Zero ) Million Standard Cub Meters per day at ex-HBJ price of gas as per the aforesaid Government pricing order. After expiry of the period of Government pricing order No.L-12015/2/88-GP dated 31.12.1991, seller shall fix the price of gas as per directive, instruction, order etc., of Government of India which is likely to be market related in accordance with the current policy of liberalisation of Government of India and the buyer shall pay to the seller such price of gas. The price of Gas is exclusive of Royalty, Taxes, Duties, and also SCA/3348/2001 12/100 JUDGMENT other statutory levies as applicable at present or to be levied in future by the Central or State Government or Municipality of any other local body or bodies payable on sale of Gas form ONGCL to the seller or on sale from seller to the buyer, and shall be borne by the buyer over and above the aforesaid price. Provided further that for supply of gas made by the seller to the buyer on fall back basis with effect from 16.5.1992, the price applicable shall be the full price of gas as applicable for gas supply made by the seller to the buyer on firm commitment basis. (emphasis supplied) 3.16 It is required to be noted that on account of commissioning of new fields, the supply of gas improved substantially which was offered by GAIL to various consumers including the petitioner company. The sub-committee submitted their report in September 1997. The committee’s recommendation on natural gas pricing reads as under: “Transportation charges for all pipelines other than HBJP, is fixed by GAIL in such a way that their costs plus tax plus a post tax return of 12% is recovered on their equity investment in pipeline. In case of HBJP, the return has been fixed by the Government – based on Long Run Marginal Cost at Rs.850/-. This is evident from the pricing control order dated 31.12.1991 where the land fall price is given at Rs.1550/- while HBJP is given at Rs.2400/- (1550+850). The transportation charges for supplies to HBJ pipeline to increase from Rs.850 tcm to Rs.1150 tcm and thereby constant for the entire pricing period. Thus, the Shanker Committee has fixed two prices, one being landfall price and the other being ex-HBJ price similar to what was done under the 1991 pricing order. The only difference being that the transportation charges in the 1991 pricing order for ex-HBJ price was Rs.850 included in the price, while under this pricing order since the price of gas was to be deregulated in due course. 3.17 The Government of India vide order dated 18.9.1997 revised the price of natural gas with effect from 1.10.1997 and determined it as under: (i) The consumer price of gas at landfall points would be linked to the price of a basket of low speed/high speed fuel oils as shown in the table below: Year General price Concessional price for SCA/3348/2001 13/100 JUDGMENT The North-East State 1997-98 55% 30% 1998-99 65% 40% 1999-2000 75% 45% ========================================================== (b) The transportation charges payable to GAIL along with HBJ pipeline was fixed at Rs.1150/-. 3.18 By communication dated 30.9.1997 the Government of India issued direction for fixation of price of gas providing, inter alia, as under: *** *** *** “b. As the international prices of fuel oil for September,1997 would only be available by the first fortnight of October 1997, the price of the basket of fuel oils mentioned above may be fixed for the quarter October-December 1997 taking into account the prices of fuel oils for the months of June, July and August 1997. This methodology of calculating the price shall be followed for each subsequent calendar quarter.” *** *** *** f. The consumer price per thousand SCM for the quarter October- December, 1997 as per the approved calculations works out to Rs.2224.68 for the general price and Rs.1104.37 for concessional price in North-East. These prices are for gas having net calorific value of 10,000 K. Cal per SCM. Since the consumer prices so determined are below the floor price approved by the Government, the general consumer price shall be Rs.2150 per thousand SCM and concessional consumer price (for North-Eastern States) shall be Rs.1200 per thousand SCM for the calendar quarter of October- December, 1997. However, for gas having a different calorific value, the price shall be adjusted pro-rata. g. The methodology for arriving at the producer price suggested at para 3 of the proposal of GAIL outlined in the letter of Director (Fin), GAIL referred to above, is approved. The producer price for the quarter October-December, 1997 calculated in the above basis at 10,000 K. Cal. (net) per SCM works out to Rs.1800/thousand SCM and the same is approved. *** *** *** k. For all subsequent quarters upto 31.3.2000, GAIL shall follow the SCA/3348/2001 14/100 JUDGMENT methodology as mentioned in the above paras and notify the gas price for each quarter. l. In addition to the price as fixed above, the transportation charge, royalty, taxes, duties and other statutory levies on the production, transportation and sale of natural gas will be payable by the consumer.” 3.19 GAIL has written a letter dated 3.10.1997 to Ministry of Petroleum stating that there is shortage of gas; that there is already extra allocation of 30% which is much more than the standard practice of 12.5% diversity factor and therefore supply of gas is being made as