Case: Union of India and Others Vs. Surya Phosphate Limited and Another

Single Super Phosphate [`SSP] is a low nutrient phosphoric fertilizer. Its two major ingredients are Rock Phosphate and Sulfur. The consumption norms of the two items for manufacturing one metric tones of SSP are 0.57 M.T. of Rock Phosphate and 0.125 M.T. of SulphurSSP was brought under Retention Price Control w.e.f. 23rd May, 1982. There are a number of units manufacturing SSP in the small and medium sectorsIn order to boost up the consumption of phosphoric fertilizer, FICC had in March, 1976 issued a scheme of flat subsidy of Rs. 1250 per tonne of p-205 [equivalent of Rs. 200 per tone of SSP]. The benefit of this subsidy was passed on the farmers by lowering suitably the prevailing price of phosphoric Sulfur2. Before 23rd may, 1982, viz., the date on which the SSP was brought under the Retention Price Control, every manufacturer of SSP, irrespective of the cost of manufacture used to get the same subsidy at the above rate. However, different retail prices were fixed for different manufacturers and for different marketing zones of the same manufacturer. The retail prices were fixed from time to time by the Fertilizers Association of India in accordance with the formula laid down by the Ministry of Agriculture in May 1966. Under this formula the ex-factory price for each manufacturing unit was fixed taking into account the prescribed fixed charges and variations in the price of raw materials and bags as compared to the costs of these materials provided for in the original formula. The result was that there was no uniformity in the price of SSP3. The Working Group on Review of Subsidy on SSP examined all these aspects and gave a report in 1980. The Group recommended that the scheme of flat subsidy at the above rate be replaced by a scheme of differential level of subsidy for each manufacturer depending on the ex-factory price and other expenses incurred by each manufacturer as fixed according to the formula/guidelines recommended by the Working Group. The Group came to the conclusion that a system of Retention Price of SSP similar to the one existing for Nitrogenous and Complex Fertilizers was not expedient. While variable costs, which constituted about 80 percent of the total cost of SSP, were susceptible of determination on a normative approach and without difficulty, the detailed costing of a fixed cost element under each unit was not a practical proposition. This was so mainly because of the existence of a large number of units manufacturing SSP which were also multi-product/multi-activity units. The Group, therefore, suggested a formula for determining the variable costs to which were to be added the fixed costs suggested by the Group in order to arrive at the ex-factory price of each manufacturing unit4. This recommendation of the Group was broadly accepted by the Government and SSP was brought under Statutory Price Control w.e.f. 23rd May, 1982. While accepting the recommendation of the Group, however, the Government made some changes in it. It is not necessary to refer to them here. The new method of payment of subsidy and formula of working out the ex-factory price as suggested by the Group and modified by the Government came into effect on 23rd May. 19825. Pursuant to the introduction of the new method of payment of the subsidy the circular letter in question, viz., that of 19th June, 1982 was addressed by the Government to all manufacturers of SSP. It is necessary to quote the circular lettero All manufacturers of Single Super Phosphate. Sub:-Single Super Phosphate--Retention Ex- factory Price in respect of ..... Dear Sir, Consequent upon issue of Government of India, Ministry of Agriculture, Deptt. of Agriculture &Cooperation, telegram No. 1-9/82-F.A. (CP) dated 22nd May, 1982 fixing a uniform retail price of Single Super Phosphate with effect from 23rd May, 1982, it has become necessary to replace the scheme for payment of uniform flat subsidy of Rs. 1, 250 per MT of p2 05 by a scheme for payment of differential rate of subsidy based on the ex- factory price worked out separately for each manufacturing unit2. To enable this office to work out the ex- factory price in respect of SSP manufactured in your unit, information in the enclosed proformae may please be furnished to this office urgently, latest by 15th July, 1982. The information should be furnished separately for the periods 1.10.81 to 31.12.81 and 1.1.82 to 31.3.82 only certified by a Chartered Accountant or your Statutory Auditors6. Along with the Circular letter, as stated in its body, proformae were circulated for collecting information of various elements contributing to the variable and fixed costs7. After the then existing units submitted the relevant information and taking into consideration their representations, the variable costs were determined with reference to the expenses for each factory on the average of three months preceding the last quarter. The costs were calculated with reference to the details furnished by each unit in the detailed proformae for variable input costs. To this cost was added the fixed costs to arrive at the ex- factory price o f each individual unit. The extracts of the relevant minutes of the meetings of the FICC held on 16th October, 1982 and 17th February, 1983 which are annexed as Annexure `C to the present petition, show the details of the manner in which the ex- factory price was worked out for the product8. The respondent-company commenced its production of SSP for the first time on 28th November, 1984, i.e., long after the replaced subsidy as suggested and worked out by the new formula came into force. The installed capacity of the unit as declared by the Company was 120 tones per day or 39, 800 M.T. per annum. As the respondent-company had no captive plant for manufacturing Sulphuri c Acid, the notional cost of a matching 43 tones per day Sulphuric Acid captive plant based on the actual cost of the standard plant for 1984 was taken at Rs. 99.81 lakhs for the purposes of computation of fixed charges applicable to the unit. It may be stated here that admittedly those manufacturing units which had a captive Sulfuric Acid plant could produce Sulfuric Acid at lesser cost and others had to procure it at a higher price from market. In order to equalize the cos t of production of SSP of both types of units this method of taking the notional cost had to be adopted as approved by the FICC. Thus, it would be seen that though the respondent-Companys unit did not incur any capital cost on setting up a matching Sulfuric Acid plant, the notional cost of a Sulfuric Acid plant to match the requirement of installed capacity of SSP was provided for while working out the conversion cost in the case of respondent-Companys unit. Based on this notion al costs which formed part of the capital employed, normative working capital, the share capital and borrowings, etc. were also worked out and their fixed charges were accordingly determined. There is no dispute that subsidy worked out by the above methodology was paid to the respondent-Company as it was paid to other units manufacturing SSP9. The respondent-Company, however, was not satisfied with the method of calculating the subsidy and insisted that while working out the subsidy the Government was obliged to take into consideration the landed costs of Sulfuric Acid at its factory as revealed in the cost data submitted by it. It worked out the subsidy on the said basis at Rs. 1, 12, 58, 449 as arrears of subsidy from the d ate it commenced production and filed a writ petition before the High Court for recovery of the said amount. The respondent-Company also prayed for injunction to restrain the Government from paying the ex-factory price of SSP manufactured by it except on the basis of its actual cost of production including the actual landed cost of Sulfuric Acid at the factory10. By the impugned judgment, the Patna High Court held that in view of the fact that the respondent-Company purchased Sulfuric Acid from open market and transported it to its factory, the Government was bound to calculate the subsidy payable to the Company taking into consideration its ex-factory price of SSP. It is this decision of the High Court which is under challenge before us.

Court's reasoning:
It is not necessary for us to go into the question as to whether the method/formula adopted by the FICC should have been made known to the manufacturers or not. Suffice it to point out that the Circular letter in question had not indicated any particular method of working out the ex-factory price. It was implicit in the said Circular letter that the ex-factory price would be worked out by the FICC on certain basis. It is incorrect to say that in the absence of a method for working out the ex-factory price indicated in the said Circular letter it should be presumed that what was represented to the manufacturing units was that they would be paid subsidy on the basis of the actual costs shown by them13. It would thus be seen that the Circular letter made no representation other than conveying to each of the manufacturing units that a scheme for payment of differential rate of subsidy in place of the earlier uniform flat subsidy was being introduced. What that differential rate of subsidy would be would depend upon the ex-factory price worked out by the FICC separately for each manufacturing unit. The method by which the ex-factory price was to be worked out for each of the manufacturing units was not indicated in the Circular letter. That was to be on the basis of the recommendation of the Group as accepted by the Government. In fact, the new method of payment of subsidy was based o n the said recommendation which also included the formula to work out the ex-factory price15. Understandably, the method adopted by the FICC for working out the ex-factory price was on a normative basis as recommended by the Group and accepted by the Government. That was as it should be. In the absence of norms for working out the costs of different components, there would virtually be a chaos and arbitrariness. To give only one instance: if a manufacturing unit were to consume more Rock Phosphate and Sulfur or Sulfuric Acid than the consumption norm, its cost of production of SSP would be higher than the cost of production of the standard SSP. It cannot be argued that in spite of it, the manufacturing unit should be paid the differential rate of subsidy on the basis of the unwarranted cost. One can multiply such instances with reference to each of the other elements of cost of producing SSP. In the absence of norms, there would be a good deal of scope for arbitrariness and misfeasance at both ends. We are, therefore, of the view that the contention urged by Shri Sen cannot be accepted.