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PETITIONER: D.C.M. LTD.

       Vs.

RESPONDENT: MUNICIPAL CORPORATION OF DELHI & ANR.

DATE OF JUDGMENT:       08/08/1997

BENCH: SUJATA V. MANOHAR, M. JAGANNADHA RAO

ACT:

HEADNOTE:

JUDGMENT: [With C.A.Nos.  1270-1294/1987, 1298/1987,  4408/1995, 1300- 1303/1987 & 11765-11800/1995]                       J U D G M E N T Mrs. Sujata V. Manohar, J.      These appeals arise as a result of certain increases in fuel adjustment  charges levied  by the second respondent on the appellant  and the  resultant arbitration.  The award of the learned  arbitrator was  the subject matter of challenge in the  High Court.   These  appeals arise from the judgment and order of the Division Bench of the-Delhi High Court.      For the  sake of  convenience we  are referring  to the facts in  Civil Appeal  No.1269 of 1987.  The facts in other appeals are similar and the disputes raised are the same.      The appellant  entered into  an agreement dated 26th of September,  1972  with  respondent  No.2  Delhi  Electricity Supply Undertaking  (DESU)  for  the  supply  of  electrical energy.  Clause 15(a) of the agreement is as follows:-      15(a): The  consumer shall pay each      month  to   the   undertaking   for      electrical energy  supplied  during      the preceding  month such amount as      shall be calculated and ascertained      in   accordance   with   the   Hate      Schedules LIP attached hereto.  The      rates contained in the schedule are      those  in   force  a  the  time  of      executing  this   agreement.    The      consumer be  eligible for  whatever      reduction  or   rebate  as  may  be      granted on  the rates  and shall be      liable   to    pay   for   whatever      surcharge  or   increase  in  those      rates as  may from  time to time be      levied or  made y  the undertaking.      Any  other   method   of   charging      decided by  the  undertaking  shall      also be applicable".      The Rate Schedule of large Industrial Power (LIP) which was annexed  to the  said agreement  was  the  same  as  was prescribed from  time to  time by the Tariff which was fixed

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by respondent  No.2 for  the  relevant  year.    The  Tariff pertaining  to   Large  industrial   power  sets   out   the availability of  such power  to large  industrial  consumers having connected  load above  100 K.W.  and the character of service -  viz. A.C.  50 cycles, 3 phase, 11 K.V. The Tariff is divided into two parts.  The first part deals with demand charges.  In addition the consumers are also required to pay energy charges.  Under energy charges. clause 1 provides for fuel adjustment charges as follows:- (For the year 1982-83)      "I  An   an  adjustment  of  energy      charges as under:-      (i)  The above  energy charges  are      based on the basic average fuel and      purchase cost  of 15.25  paise  per      KWH.      (ii) The actual  cost of  fuel used      during any   period  shall  be  the      amount in rupees of the cost of all      types  of   fuel   burnt   in   the      Undertaking’s  Thermal   Generating      Plants in that period.      (iii) The  actual  cost  of  energy      purchased shall  be the amount paid      in rupees  for import of energy for      that period.      (iv) The cost  of  energy  per  KWH      sold shall be the quotiant computed      on dividing  the sum  of  (ii)  and      (iii) by  the KWH  sold during  the      period.      (v)  The  increase  o  decrease  in      cost of  per KWH  sold shall be the      difference of  (iv) * (i) above and      accordingly  shall   be  added   or      substracted  to  the  above  energy      rates.      Final  adjustment   on  account  of      variation in energy charges will be      made as  soon as possible after the      close of  the period of account but      adjustment as  may be provisionally      fixed by  the DESU  Management from      time to  time will  be incorporated      as a  part of  the monthly bill and      shall be  payable by  the consumer.      Such provisional  rates as and when      finalised shall  have retrospective      effect from  the beginning  of that      financial year."      This was  the Tariff  for the year 1982-83.  The energy charges were  prescribed at  Rs. 15.25  per KWH.  These were subject to adjustment.      Respondent No.2  enhanced the  energy charges  from Rs. ‘5.25 to  20 44  paise per  unit  whereupon  the  appellants disputed the  increase and  filed suits  under Section 20 of the Arbitration  Act for referring their dispute relating to the increase  in fuel  adjustment  charges  to  arbitration. During the  pendency of  the suit,  fuel adjustment  charges were further  enhanced from  20.44 paise  per unit  to 27.97 paise per unit on 12th of March 1983. and to 29.47 paise per unit in May, 1983.      In the  suit of  the appellants under Section 20 of the Arbitration  ct.     Learned   Single  Judge   examined  the arbitration clause  in the  contract which  was very  widely worded.   He held  that any  question or  difference arising

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between the  parties as  to any  matter in any way connected with or  arising out  of the agreement or with regard to the rights, duties  or liabilities of either party in connection with the  agreement, was  referable to arbitration.  He said that the  dispute was  with regard  to the  liability of the petitioners to pay the fuel adjustment charges.  The quantum of this  liability was disputed.  Such a dispute was covered by the  arbitration clause.   He  further held, "It will, of course, not be open to the petitioners to contend before the arbitrator that  the rate  fixed in  the Tariff  is high nor will it  be open to the petitioners to challenge the formula which has  been laid  down.  It will be outside the scope of the arbitration  to ask  the arbitrator  to enquire into the correctness of  the accounts  of DESU".    In  fact  in  the earlier part  of the  judgment  also  learned  Single  Judge observed that  there can  be no  dispute with  the rates  so fixed or the method of computation, which can be referred to arbitration.  The dispute in the present cases was really as to whether the variation of fuel adjustment charges had been done in accordance with the formula or not.  The petitioners said that  they were willing to pay the energy charges which were fixed in accordance with the said formula.  The learned Judge then  said.  "To my mind, though it is not open to the petitioners to  challenge the correctness of the rates fixed or the  formula which  is laid down for computing the amount of energy charges, but it is open to them to contend that in working  out   the  formula   no  irrelevant  or  extraneous consideration shave  been taken  into account  or  that  the formula has  not been  properly followed while computing the fuel adjustment charges which are now being demanded.  While considering whether the said charges have been worked out in accordance with  the formula  or  not  it  is  not  open  to challenge the  correctness of the accounts or the figures of respondent No.2.  But as  already noted  t can  be contended that  some   relevant  factors  have  not  been  taken  into consideration or  irrelevant factors  have been  taken  into account."   With these  directions,  namely,  (1)  That  the petitioners before  the court  were not  entitled to contend before the  arbitrator that the rate fixed in the Tariff was high; (2)  it was  not open  to the petitioners to challenge the  formula   laid  down;  (3)  it  was  not  open  to  the petitioners to  ask  the  arbitrator  to  enquire  into  the correctness of  the accounts of DESU, learned Judge referred the following question to arbitration:-      "Whether   the    fuel   adjustment      charges have  been  fixed  and  are      being demanded  by respondent No. 2      from time  to  time  in  accordance      with the  Tariff for  the  year  in      question."      He said that this reference was comprehensive enough to include all  the questions  which can  be raised  before the arbitrator including  the question as to whether provisional revision of  such charge  can be made from time to time with retrospective effect.      The learned  Judge appointed a retired Chief Justice of the Delhi  High Court  as slow  arbitrator.   The arbitrator entered upon  the reference  and by  a speaking  award dated 24.9.1985 deal  with the  various issues  which were  raised before the arbitrator.  The award was filled in Court and an application was made by the appellants under the Arbitration Act for  the award being made rule of the Court.  The second respondent filed its objections to the award before the High Court.   A learned  Single Judge  of the  High Court,  inter alia, held  that there  was an error apparent on the face of

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the award  in so  far as  it  dealt  with  transmission  and distribution losses.   The  award of  the arbitrator  on the question of  transmission and  distribution  losses  was  et aside in so far as it said that these two items could not be taken into  consideration for working out the formula for an increase in fuel charges.      Learned Single Judge also set aside the award in so far as it  held that  demurrage charges could not be included in the cost of fuel.      The appellants  who were  aggrieved by the judgment and order of  learned Single  Judge preferred an appeal before a Division Bench of the High Court.  The Division Bench of the High Court  partly allowed  the appeal  on the  question  of demurrage.   It, however,  upheld the  findings  of  learned Single  Judge   on  the   question   of   transmission   and distribution losses  being taken into account in calculating fuel adjustment  charges.  The present appeals before us are from the  judgment of  the Division  Bench.  The question of demurrage charges has not been pressed before us.  Hence the only question  we have  to consider  is the  one relating to transmission and distribution losses.      The appellants  who were aggrieved by the judgement and order of  learned Single  Judge preferred an appeal before a Division Bench of the High Court.  The Division Bench of the High Court  partly allowed  the appeal  on the  face of  the award  in   so  far   as  it  dealt  with  transmission  and distribution losses.   The  award of  the arbitrator  on the question of  transmission and  distribution losses  was  set aside in so far as it said that these two items could not be taken into  consideration for working out the formula for an increase in fuel adjustment charges.      The appellants have challenged the findings of the High Court.   They contend  that it  was not  open either  to the learned Single  Judge or  to the  Division Bench of the High Court to examine the correctness of the award.  The award is binding on  the parties.   The  respondents contend that the arbitrator acted  beyond  the  scope  of  his  reference  in examining whether transmission and distribution losses could be  taken  into  account  while  applying  the  formula  for calculating fuel adjustment charges.      In  considering  the  scope  of  reference  before  the arbitrator we  have to  bear in mind the observations of the Reference Court  to the  effect that  it was not open to the arbitrator to  examine either the correctness of the formula statutorily laid  down in  the Tariff  or the correctness of the accounts  and figures  supplied by  DESU. The arbitrator was required  to examine  whether the  formula was correctly applied and  the  amount  of  increase  in  fuel  adjustment charges was  correctly calculated by taking into account all relevant factors.   In  this light if we examine the formula for fuel  adjustment charges,  it lays  down that the actual cost of  fuel used  during  any  period  in  DESU’s  Thermal Generating Plants  plus the  actual cost of energy purchased from other power plants by DESU will together constitute the cost of  fuel.   This shall be divided by the KWHs of energy sold during  the same period in order to arrive at the basic average cost  per unit  of  KWH  sold.    This  increase  or decrease in  the cost  per KWH  sold as  against the  energy rates already specified will be the final adjustment charge. This in essence.  what requires to be ascertained is 91) the actual cost  of fuel  used in the undertaking’s power plants during any  specified period;  (2) the actual cost of energy purchased by the undertaking for the period from other power plants;   and 93)  the KWHS  sold by  the undertaking during that period.   This  formula has  been consistently followed

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right from  1977 onwards.    Learned  Single  Judge  in  his judgement has  set out  how this  formula has been worked by the second  respondent  all  these  years.    He  has  given comparative figures for the years 1977-78 and 1980-81. ------------------------------------------------------------ S. No.    Particulars              1977-78        1980-81                                    (Actuals)      (Actuals) ------------------------------------------------------------ 1.   Kw hrs. generated             1593.194       1313.179      (Million Kw hrs.) 2.   Auxiliaries                   137.661        129.541      consumption 3.   Net Generation                1455.533       1183.638 4.   Kw hrs. Purchased             548.267        1613.019 5.   Net Generation &              2003.800       2796.657      Purchase (3 + 4) 6.   Transmission and              277.539        424.499      Distribution losses 7.   Units sold (5 -6)             1726.261       2372.158      (million Kw hrs.) 8.   Cost of Fuel (Rs. in lakhs)   1637.95        2443.86 9.   Cost of Power purchases       1024.98        4301.60      (Rs. in lakhs) 10.  Total 8 + 9 Rs. (lac)         2662.93        6745.46 11.  Fuel & Purchase cost per      15.43          28.44      unit (10+7) (Paise) 12.  Round up for Tariff base      15.25          15.25 13. Fuel & Purchase Surcharge       --            13.19 ------------------------------------------------------------      The table  in items  1 to  5 shows  the total net power units available  (generation +  purchase which is the figure at serial  no.5.   In order to arrive at the number of units sold, the  second respondent  has deducted  from  net  units generated and  purchased, the  number of  units lost  in the process of  transmission and  distribution.   The rest  have been sold.   This  is how the figure of units sold at serial number 7  is arrived  at.   The  calculation  appears  o  be correct.   Everything which  is generated  and purchased has not, and  cannot be  sold. There  are losses of power during transmission and  distribution for various reasons.  Some of the causes  of such  loss have been eloquently expressed and deprecated  in   the  two   judgments  of  the  High  Court. Inefficiency in transmission, not preventing loss on account of theft  of power and not being able to reduce transmission and  distribution   losses  to   an  acceptable   level   by international  standards,  undoubtedly  result  in  a  heavy financial burden  being imposed  on the  national and on the consumers of  electricity.   When there is acute shortage of power, such  losses become even more unacceptable.  But that is not  the question  before us.   The formula requires that the cost  of fuel  used for generation of power and the cost of energy  purchased from the power plants has to be divided by the  number of  units of energy sold by respondent No. 2. Units which  are  sold  are  clearly  units  generated  plus purchased, less units lost in transmission and distribution. It is  the balance  units which  actually reach the consumer and are  sold.   Therefore,  transmission  and  distribution losses have  to be  taken into account in order to arrive at the correct  figure of  units which  are sold  to consumers. There is  nothing extraneous  in taking  into account losses during transit  when energy it transmitted from the point of generation to  the consumer.  The units sold are units which reach the consumer.      This is how the formula has been worked throughout.  In fact the  figure of  basic average fuel and purchase cost of

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15.25 paise  per KWH mentioned in Clause 1 sub clause (i) of the 1082-83  Tariff was also arrived at in the same fashion. The further increases in fuel adjustment charges are also on the same  basis.   Learned Single  Judge, therefore, rightly observed that  the elements  which went into the calculation to arrive  at the  figure of  15.25  paise  would  be  quite relevant for  arriving at  the  increase.    These  elements cannot  be   the  subject-matter  of  challenge  before  the arbitrator.   The arbitrator  has also  erred in considering transmission and  distribution losses  as a separate item of charge under  the adjustment  formula.   We agree  with  the reasoning and  conclusion arrived  at by  the learned Single Judge in  this regard  which has been upheld by the Division Bench.      The arbitrator  was  required  to  examine  the  narrow question whether  the formula had been properly applied.  It was not  open to him to examine the correctness or otherwise of the  formula.  He had to examine how the formula had been worked.  The formula had clearly set out the various factors to be  taken into  account.   The arrive  at the units which were sold, the second respondent had deducted from the total units available  for distribution,  units which  are lost in transit.   This is  not something which is irrelevant to the formula.   It is  an essential element which has to be taken into account  in order  to decide  one  basic  item  of  the formula, namely, the units which were sold.  The arbitrator, therefore, was  not right  in  distorting  this  formula  by removing the  factor of transmission and distribution losses from calculation  of  the  units  sold.    The  arbitrator’s jurisdiction  was   confined  to   examining   whether   the calculations  were   in   accordance   with   the   formula. Therefore, in  effect, the  arbitrator has  acted beyond the scope of his reference in eliminating an important factor in calculation of the formula.  This can also be looked upon as an error  of law  apparent on  the face  of the record.  The figure of  units sold  cannot, take into account units which were, in  fact, not  sold but  were lost during transmission and distribution.   By  ignoring the  manner in  which  this formula had been applied for more than 10 years uniformly in the  case   of  all   large  industrial   corporations,  the arbitrator has  committed an  error of  law apparent  on the face of  record.   Because  he  has  thereby  distorted  the formula and  thus acted  beyond the  scope of  his reference which was  confined to  examining a proper quantification of the increase  in fuel  adjustment charges in accordance with the formula.      The appellants  have urged  before us that the views of the arbitrator  are binding  upon the  parties;   and  if  a question of  law is  referred to the arbitrator his decision will be  binding on  the parties.  They have relied upon the wall-known decision  in the  case of Tarapore and company v. Cochin Shipyard Ltd., Cochin and Anr. (1984 2 SCC 680) and a series of other cases in support of the submission that if a question of  law is  specifically referred by the parties to the arbitrator  for decision,  the award  of the  arbitrator would be  binding on  the parties and the Court will have no jurisdiction to  interfere with the award even on the ground of error  of law  apparent on the record.  We are not citing these decisions  because in the present case, as was rightly held by  learned Single Judge of the High Court, there is no specific  question   of  law  which  has  been  referred  to arbitration.   The  limited  reference  to  arbitration  was whether the  fuel adjustment  charges were being demanded in accordance with  the Tariff  and the  formula laid down, for the year in question.

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    It was  further submitted  by the  appellants that  the arbitrator  was   required  to   examine  whether  the  fuel adjustment charges  were in accordance with the formula laid down in  the Tariff  and therefore.   It  was  open  to  the arbitrator to  examine all  the ingredients of this formula. If such an examination results in the arbitrator eliminating some important  ingredients of  the formula and this results in a  total distortion  of the formula which is agreed to be applied by  both the  parties, the  arbitrator  exceeds  the scope of  the  reference  when  he  does  so.    This  is  a jurisdictional error  which can be examined by the Courts in deciding whether to uphold the award or not.      One of the decisions which was quoted by the appellants in this  connection in  support of their argument was in the case Hind Builders v. Union of India (1990 3 SCC 338) where, in the case of a non-speaking award, the arbitrators without overlooking  any   term  of   the  contract  acted  upon  an interpretation of  certain clauses  in the contract on which two views were possible, this Court said that this was not a case of  any error  apparent on  the face of the award.  The facts of  the present case are very different.  In the first place, there  is a  speaking  award.    The  arbitrator  was required to  examine the application of the formula on which there was  no dispute,  to calculate  the increase  in  fuel adjustment charges.   In  doing so,  the arbitrator examined the various ingredients which went to determine (1) the cost of the  units generated; (2) the cost of the units purchased from other  power plants;  and (3) the number of units sold. The formula  in effect  was very  simple.  The total cost of units available  for being set in transmission for supply to the consumers was to be divided by the number of units sold. This would  give the cost per unit of each unit sold.  There was no  dispute with  his formula.   What  the arbitrator in effect did  was to  say that the units sold are no different from the  total number  of units  available  to  the  second respondent for  being put in transmission in order that they may be  distributed to  the consumers.   He, therefore, held that the  cost of  all units  which were  made available for transmissions  and  distribution  should  be  determined  by dividing the total cost by the number of units which were so made available.   He in effect, replaced the third factor in the formula  "Units sold"  by "Units manufactured plus units bought from other power stations’.  This has clearly changed the statutory formula.  The arbitrator was not authorised to examine the  validity of  the formula  or to  change it.  He has, therefore,  committed  a  jurisdictional  error  in  so "interpreting" the  formula.  This is a jurisdictional error which is also apparent on the face of the award.      We need  not examine  the number  of cases  which  were cited before  us setting  out the  grounds on which an award can be  set aside  partly or wholly.  It is well established that an  arbitrator  cannot  go  beyond  the  scope  of  his reference.   If he  has exceeded his jurisdiction, the award to that  extent can  be set  aside provided that the part of the award  being quashed is severable from the rest.  In the present case, therefore, the High Court was right in setting aside the  award to the extent that it excluded transmission and distribution losses.      No other issue was raised before us.  Therefore, we are not examining  any other  aspect  of  the  award.    In  the premises, the appeals are dismissed with costs.