Duncan Industries Ltd. And Anr. vs Union Of India (Uoi)

1. Delay condoned in the Special Leave Petition arising out of CC No. 12164 of 2004. Leave granted in both the Special Leave Petitions.

3. M/s Duncan Industries Ltd. (hereinafter "the First Appellant") is engaged in the business of manufacturing and selling urea (a fertilizer). In 1993, the First Appellant acquired the urea plant of M/'s Indian Explosives Ltd. (a unit Page 911 of ICI India Ltd.). The Second Appellant is a shareholder in the First Appellant-Company (hereinafter, collectively "the appellants").

4. In 1957, the Government notified fertilizers (including urea) as an "essential commodity", under the Essential Commodities Act, 1955 (hereinafter "the EC Act"). The Fertilizer (Control) Order, 1957 (hereinafter "the Fertilizer (Control) Order") was made in exercise of the powers conferred by Section 3 of the EC Act. The Fertilizer (Control) Order has been revised from time to time. Through the Fertilizer (Control) Order, the Government was able to fix the maximum retail price of fertilizers, which was to be complied with by dealers, manufacturers etc. However, since this controlled-price mechanism resulted in losses for manufacturers, it was suggested that the Government provide subsidies to make good the losses. Accordingly, the Government constituted a Committee under the Chairmanship of Mr. S.S. Marathe (hereinafter "the Marathe Committee") to introduce a rational system for the pricing of fertilizers in the country. The Marathe Committee was to suggest a mechanism that would ensure a reasonable return on investment to manufacturers of fertilizer, facilitate the healthy development and growth of the fertiliser industry, and also ensure that the prices of fertilizer were kept within reasonable limits. To this effect, the Marathe Committee made a detailed report suggesting an intricate system of fertilizer subsidies known as the "Retention Price Scheme" (hereinafter also mentioned as "the Scheme"). This report was considered in detail by the Government which decided to introduce the Retention Price Scheme for units in the nitrogenous fertilizer industry (with effect from 1.11.1977).

7. The Retention Price Scheme envisaged a Fertilizer Price Fund Account for the payment of subsidies. In respect of those units where the Retention Prices Page 912 were lower than the maximum retail price, the units were required to credit the difference to the Fertilizer Price Fund Account. Conversely, units whose Retention Prices were higher than the maximum retail price would receive the difference from the Fertilizer Price Fund Account, as a subsidy.

8. The Scheme was to be administered by an inter-ministerial committee, which also had representatives of the fertilizer industry. This committee was called the Fertilizer inter-Coordination Committee (hereinafter "the FIC Committee"). The FIC Committee was to have an Executive Director and adequate staff to maintain accounts, make and recover payments, undertake costing, and collect and analyze production data, cost and other inputs, in order to work out the Retention Price periodically and make appropriate adjustments.

9. The Government's decision to introduce the Retention Price Scheme was formally notified on 1.11.1977 in the Official Gazette. However, even prior thereto, a letter (dated 24.10.1977) was written by the Government to the Managing Director of M/s Indian Explosives Ltd. (later acquired by the First Appellant), wherein the details of the Retention Price Scheme were indicated. It was pointed out in this letter that:

6. And whereas it is a feature of the scheme that units whose retention price as fixed under the scheme is lower than the net realization, shall pay the difference to the Fertiliser Industry Coordination Committee (hereinafter referred to as the "Committee"), which has been set up by the Government to administer the retention price scheme, and that units whose retention price as fixed under the scheme is higher than the net realisation, will receive the difference as subsidy from the said Committee;

6. The Retention Price was to be worked out by calculating the cost of manufacture of urea per ton. The cost of manufacturing urea comprises three types of costs: (i) Capital-related costs (ii) Conversion costs (or Fixed costs) and (iii) Variable costs (or Input costs). Capital-related costs incurred by a manufacturer were the total amount of capital invested, including loan and equity. Conversion costs included salaries, overheads, chemicals and consumables, repair and selling expenses, catalysts etc. Variable costs included the costs of the feedstock (the feedstock may vary from unit to unit), utilities costs, packaging etc. Also, this formula of Retention Price provided a post-tax return of 12% on the net worth. The working of the Scheme provided for a fair ex-factory Retention Price per ton of urea based upon a capacity utilization of 80% to arrive at the Variable Cost. In this manner, the Marathe Committee had worked out the Retention Price for each of the twenty-one urea-manufacturing units. In summary, the combination of Conversion costs, Variable costs and Capital-related charges (including the 12% post-tax return) was styled as the Retention Price.

20. The appellants challenged the working of the Retention Price Scheme by Civil Miscellaneous Writ Petition No. 43042/2002. This Writ Petition was dismissed by the High Court through the impugned judgment dated 7.11.2003. By another order dated 7.11.2003, following the impugned judgment, the High Court also dismissed Civil Miscellaneous Writ Petition No. 43934/2001.

31. The first contention of Dr. Dhavan must, therefore, fail since the Retention Price Scheme is a mere administrative scheme without any statutory flavour.

Assured Returns

34. It is next contended by Dr. Dhavan that the Government is estopped from formulating a scheme under which the Retention Price fixed would deny the First Appellant the assured 12% post-tax returns. We do not agree.

Reasonableness and Legitimate Expectation

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The Case of MM Nagarjuna Fertilizers

The Final Findings

44. Despite the bulky material and lengthy arguments presented to us, we find that this is a case full of sound and fury, signifying nothing. Indeed, we have found against the appellants on every point that they have chosen to impugn the judgment of the High Court. In the result, these appeals must fail and are hereby dismissed with no order as to costs.