Supreme Court Rules Renusagar Power Company as Hindalco’s “Own Source of Generation” for Electricity Duty Levy

Landmark judgment permits lifting of corporate veil, affirms electricity duty applicability, and clarifies scope of government’s exemption powers under U.P. Electricity (Duty) Act, 1952

In a significant verdict dated July 28, 1988, the Supreme Court of India in the case of State of Uttar Pradesh v. Renusagar Power Company Ltd. resolved a long-standing dispute on the levy of electricity duty on power consumed by Hindustan Aluminium Corporation Ltd. (Hindalco) from its wholly owned subsidiary, Renusagar Power Company Ltd. The apex court held that Renusagar’s power generation must be treated as Hindalco’s “own source of generation” under section 3(1)(c) of the Uttar Pradesh Electricity (Duty) Act, 1952, thus permitting the lifting of the corporate veil between the parent company and its subsidiary for the purpose of electricity duty.

Background:

Hindalco established an aluminium factory at Renukut, Uttar Pradesh, in 1959, relying on assurances of cheap and adequate electricity supply. To meet its power needs, Hindalco incorporated Renusagar Power Company Ltd. in 1964 as a 100% subsidiary to set up a captive power plant. Renusagar commenced power generation in 1967-68 and supplied electricity exclusively to Hindalco.

The U.P. Electricity (Duty) Act, 1952, was amended multiple times, including in 1970, to levy electricity duty on consumption. The key question was whether electricity generated by Renusagar and supplied to Hindalco was to be treated as consumption from Hindalco’s “own source of generation” (exempt or subject to lower duty) or as electricity sold by a licensee (subject to higher duty). The State Government levied electricity duty on the energy supplied by Renusagar to Hindalco, rejecting Hindalco’s claim for exemption.

Legal Issues:

1. Whether Renusagar Power Company Ltd.’s generation could be regarded as Hindalco’s “own source of generation” under section 3(1)(c) of the U.P. Electricity (Duty) Act.

2. Whether the State Government’s order rejecting exemption from electricity duty complied with principles of natural justice and was valid in exercise of its powers under section 3(4) of the Act.

Supreme Court’s Analysis and Findings:

Lifting the Corporate Veil:

The Court undertook a detailed examination of the facts, corporate structure, and operational control. It found that Renusagar was a wholly owned subsidiary, controlled and financed by Hindalco, with no independent volition. Renusagar’s power plant was established solely to serve Hindalco’s aluminium production needs, with a single transmission line supplying power exclusively to Hindalco. Hindalco controlled all operational aspects, financing, and expansion of Renusagar’s power generation.

The Court held that in such circumstances, the corporate veil between Hindalco and Renusagar could be lifted. The Court emphasized that the concept of lifting the corporate veil is expanding, especially where it serves justice and public interest. It rejected the State’s contention that Renusagar should be treated as a separate entity, citing precedents where courts have pierced the veil to examine the realities over formal legal distinctions.

Meaning of “Own Source of Generation”:

The Court interpreted the phrase “own source of generation” pragmatically, considering the commercial and factual realities over technical or strict legal form. It noted that all authorities, including the State Government and Electricity Board, had historically treated Renusagar as Hindalco’s own source of generation, for example, in power cut decisions.

Accordingly, the Court ruled that the electricity consumed by Hindalco from Renusagar must be deemed consumption from its own source of generation under section 3(1)(c) of the Act, making it liable to the corresponding electricity duty rates.

Power of State Government under Section 3(4):

The Court examined the State Government’s power to fix rates or grant exemption in public interest. It held that the Government’s decision to reject exemption was a policy and quasi-legislative decision, requiring assessment of multiple factors including industrial promotion, revenue needs, and prevailing rates.

The Court observed that the Government had duly considered relevant factors such as the cost of power to Hindalco compared to similar industries in other states, the impact on foreign exchange, and the profitability of Hindalco. It found no violation of natural justice principles as the respondents were given opportunities for hearing and access to relevant reports.

The Court further held that fixing electricity duty rates and granting exemptions are legislative functions subject to public interest and not always requiring prior hearing.

Outcome:

1. The Supreme Court upheld the finding that Renusagar Power Company Ltd. is the “own source of generation” of Hindalco under the Act.

2. The Court set aside the High Court’s order that invalidated the State Government’s rejection of exemption application, holding that the State had acted within its powers and in public interest.

3. However, the Court modified the electricity duty bills to apply the lower duty rate applicable to consumption from “own source of generation” rather than the higher rate applicable to licensee sales.

4. The Court directed that the electricity bills be recomputed accordingly, and payment be made within two months.

Significance:

This judgment is a landmark in Indian company law and taxation jurisprudence as it affirms the principle that corporate veil may be lifted to ascertain the true nature of economic realities, especially in taxation and regulatory contexts. It clarifies the interpretation of “own source of generation” under electricity duty laws and delineates the scope of State Government’s powers to levy duties and grant exemptions in public interest without strict procedural constraints.

The ruling balances the object of raising revenue for State development with the need to promote industrial production and recognizes the commercial realities of captive power plants operated through subsidiaries.

Statutory provisions

Uttar Pradesh Electricity (Duty) Act, 1952 - Section 3(1)(c), Section 3(4), Section 4(1)(c), Section 9; Indian Electricity Act, 1910 - Section 28; Constitution of India - Articles 14, 19(1)(g), 226

State of U.P. v. Renusagar Power Co., (SC) : Law Finder Doc Id # 89616