Important point
The scheme of subsidies, known as the ‘Retention Price Scheme’, granted by the Union of India to fertilizer manufacturers, could be retrospectively modified to the detriment of these manufacturers.

Headnote:Essential Commodities Act, 1955—Section 3—Fertilizer (Control) Order, 1957—Retention Price Scheme for introducing a rational system for pricing of fertilizers in the country—Withdrawal of—Whether scheme of subsidies granted by Union of India to fertilizer manufacturers, could be retrospectively modified to the detriment of these manufacturers—(Yes)—Retention Price Scheme is not linked to any statute in any manner—It is a mere administrative order—The Scheme, both conceptually and in its actual operation, has always had an element of retrospectivity built in—Scheme was not the result of any unilateral action on the part of Government.
       Held : 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). (Para 4)
       There is no provision that deals with the grant of subsidies for producing fertilizers. We repeatedly asked Dr. Dhavan as to under which law the Government was obliged to make available subsidies to fertilizer manufacturers. He fairly admitted that there was no such obligation on the Government, and stated that if the Government decided to withdraw the Scheme, it would only have to comply with the requirements of Article 14. Indeed, it must be remembered that the Retention Price Scheme is a result of the Report of the Marathe Committee. It was intended to serve as a measure of alleviation to fertilizer manufacturers, so that they were not hit by the rising prices of inputs, especially since the retail price of the fertilizer was itself controlled. Thus, it is evident that the Retention Price Scheme is not linked to any statute in any manner whatsoever, but is a mere administrative order. (Para 24)
       At the outset, we must note that the Retention Price Scheme, both conceptually and in its actual operation, has always had an element of retrospectivity built-in. Indeed, the correspondence between the parties indicates that the Retention Price was always fixed and made applicable ex post facto from the beginning of the pricing period with adjustments to be made towards payments and recoveries. (Para 27)
       At the outset, we notice that the Scheme was not the result of any unilateral action on the part of the Government. Although the result of an administrative decision, it was grounded in an agreement reached between the Government and certain fertilizer manufacturers. Indeed, it was open to the manufacturers to decline to enter into such arrangement. This is evident from the letter of the Government dated 24.10.1977, which put forward the Scheme. As discussed earlier, this letter requested M/s Indian Explosives Ltd. (later acquired by the First Appellant) to enter into the Scheme as suggested, so that it may get the subsidy. The subsidies were, of course, subject to the provisions of the Retention Price Scheme, and subject to the undertaking to be given. (Para 31)
       Turning to the Article 14 argument, we emphatically reiterate the now-accepted position that Article 14 does not require this Court to examine the intricacies of an economic scheme or pricing policy for its merits or its correctness, for that is in the domain of the executive or the legislative branches of the Government. Indeed, even if the Scheme, as revised, is “unwise” or even “unjust”, there is no recourse before us for. (Para 37)

Judgment

Srikrishna, J.—Delay condoned in the Special Leave Petition arising out of CC No. 12164 of 2004. Leave granted in both the Special Leave Petitions.

2. The question to be answered in this case is: whether the scheme of subsidies (known as the “Retention Price Scheme”) granted by the Respondent-Union of India (hereinafter “the Government”) to fertilizer manufacturers, could be retrospectively modified to the detriment of these manufacturers. In our view, this question needs to be answered in the affirmative.

The Retention Price Scheme

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 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).

5. A brief outline of the Retention Price Scheme is necessary. The Retention Price Scheme was devised with a view to determine the appropriate subsidy for fertilizer manufacturers. The subsidy is calculated as the difference between the “Retention Price” and the maximum retail price fixed for fertilizers (under the Fertilizer (Control) Order). A detailed formula prescribed under the Scheme determines the Retention Price for fertilizers.

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 comb

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2006 Supreme(SC) 116

Important pointThe scheme of subsidies, known as the ‘Retention Price Scheme’, granted by the Union of India to fertilizer manufacturers, could be retrospectively modified to the detriment of these manufacturers.

Cases Referred (6)

Important point
The scheme of subsidies, known as the ‘Retention Price Scheme’, granted by the Union of India to fertilizer manufacturers, could be retrospectively modified to the detriment of these manufacturers.