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CASE NO.: Appeal (civil)  2549 of 2001

PETITIONER: Union of India & Ors

RESPONDENT: State of U.P. & Ors

DATE OF JUDGMENT: 01/11/2007

BENCH: A.K.MATHUR & MARKANDEY KATJU

JUDGMENT: J U D G M E N T  

A.K. MATHUR, J.

1.      This appeal is directed against the judgment dated 12.12.2000   passed by the  Division Bench of the  Allahabad High Court  whereby  the Division Bench has dismissed the writ petition filed by the  appellants and upheld the recovery proceedings initiated against the  appellants for the demand raised by the Jal Sansthan, Allahabad as  water and sewer  charges. 2.      The Union of India and two others filed a writ petition before  the High Court of Allahabad challenging the orders of recovery dated  1.7.1999 and 20.12.1999 issued by the Executive Engineer, Jal  Sansthan, Khusru Bagh, Allahabad on account of service charges on  Railway properties situated at Allahabad for the period from October,  1994 to March, 1999. The appellants also challenged the recovery  certificate issued by the Tahasildar, Sadar, Allahabad for recovery of  a sum of Rs.26,23,360/- from the appellant No.2 i.e. the Divisional  Railway Manager, Northern Railway,  Allahabad.  It was alleged  by the  Jal Sansthan that  the appellants were liable to pay the sewerage  charges for 3125 seats  at the rates notified under Allahabad Jal  Sansthan Notification published in U.P. Gazette dated 19.11.1994.  The  plea of the appellants was that they were holding the property of the  Central Government for  which the service charges were not payable  under  Article 285 of the Constitution of India as such  charges were  in the nature of a tax.  It was submitted that in view of the policy  taken by the Ministry of Railways, Government of India such charges  cannot be recovered as this  was totally exempted but the respondent \026  Jal Sansthan did not heed to it and they moved the Tahasildar, Sadar,  Allahabad for  effecting recovery. Therefore, the appellants were  constrained to file the present writ petition before the High Court of  Allahabad.

3.              The writ petition was contested by the respondents and they  filed their reply and pointed out that in view of various circulars of  the Ministry of Railways, the appellants have been paying the service  charges to the Jal Sansthan and in that connection it was pointed out  that other Central Government Offices situated in Allahabad i.e.  Telephone Department; Post Offices;  Accountant General Office;  Central Excise Department; Income Tax Offices were all making regular  payment of service charge and sewerage charge to the Jal Sansthan,  Allahabad. It was also pointed out that earlier the demand of service  charges was being paid by the Railway Administration to the Allahabad  Nagar Mahapalika but  with the establishment of Allahabad Jal Sansthan  under the U.P. Water Supply and Sewerage Act, 1975 (herein after to be  referred to as\022 the Act\022) the aforesaid charges were being levied and  realized by the Allahabad Jal Sansthan.  4.              On the basis of these pleadings the question that came up  before the Division Bench of the High Court was whether such demand

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raised by Allahabad Jal Sansthan for the services rendered by it to  the Railway colonies was sustainable or not.  The short question was   whether Article 285 of the Constitution of India will exempt the  Railway Administration from paying the water and sewerage charges  under the Act of 1975. In this connection, reference was specially  made to two decisions of this Court i.e. Union of India v. Purna  Municipal Council & Ors. [(1992) 1 SCC 100] &  Union of India & Anr.  V. Ranchi Municipal Corporation, Ranchi & Ors. [ (1996) 7 SCC 542].   There is no dispute that  the bulk of water is supplied by the Jal  Sansthan for maintenance of the railway platforms as well as railway  colonies and the Jal Sansthan is catering to the need of maintaining  the sewerage system not only at the railway stations but in the  adjoining  areas and also the residential quarters, offices, godowns,  shades are being maintained by the Union of India through the  Railways.  The contention of the appellants in the writ petition was  that in  view of the aforesaid two decisions of this Court the  question is no more res integra and the Jal Sansthan cannot charge for  the supply of water and maintenance of sewerage system. In this  connection, Section 184 of the Railways Act, 1989 was also referred to  which lays down that the railway administration shall not be liable to  pay any tax in aid of the funds of any authority unless the Central  Government by notification declares the railway administration to be  liable to pay the tax specified in such notification.  In this  connection, Clause (I) of Article 289 of the Constitution was also  pressed into service.  But the High Court did not dwell on this aspect  in absence of the material placed in support thereof and did not  permit to raise this plea.  

5.              As against this, it was contended on behalf of the  respondents that the writ petitioner- appellants herein were paying  its predecessors  the amount for water and sewerage charges and there  was no reason why they should discontinue the payment for the same.   However, it was contended by the appellants that merely  because they  were paying the charges that does not become law or a vested right  accrued in favour of  the respondents to continue with the charges. 6.     It was contended by the Jal Sansthan that the so called water  and sewer charges is not a tax and  it is a fee for the services  rendered by the Jal Sansthan. Hence the  exemption granted to the  property of the Union from the State taxation under Article 285 of the  Constitution  has no relevance to the present case as the property of  the Union of India was not being subjected to any tax.  It was only a   fee which has been charged for the services rendered and this has been  the practice which is prevalent since long as other departments of the  Central Government have been paying the same.  In this background,   the Division Bench of the High Court after exhaustively dealing with  several  cases on the subject came to the conclusion that in view of   the provisions of the Act of 1975 and with reference to Article 285  and Article 289 of the Constitution of India, consumption charges on  water or such services which are rendered under the statutory  obligation for which the Jal Sansthan is to maintain its own funds is  a fee and not tax.  Hence,  the writ petitioners were  liable  to pay  such charges  and they must honour the bills which have been served  upon them. It was also observed that the appellants have been  uninterruptedly paying such bills  as  a contractual obligation. It  was also pointed  out that the railway is not being charged with any  tax but what is being charged is a fee for the service rendered by the  Jal Sansthan. Aggrieved against this order passed by the Division  Bench of the High Court, the present appeal was filed by the  appellants.

7.      We have heard learned counsel for the parties and perused the  record.  One thing is very clear from the facts, namely,  that  the  Jal Sansthan  which has been established under the Act of 1975, has  taken over certain duties of the Municipality i.e. supply of water and  maintenance of sewer. It is also not in dispute that prior to this,

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the railways were paying for the services like water and sewer to the  then Municipality and likewise other departments of the Central  Government are also paying the same charges.  Therefore, the question  is whether the service charges like supply of water and sewerage can  be said to be a tax on the properties of the Railways.  8.    Article 285  exempts the property of the Union from State  taxation. Article 285 of the Constitution reads as under :

       \023  285. Exemption of property of the Union  from State taxation.- (1) The property of the Union  shall, save in so far as Parliament may by law  otherwise provide, be exempt from all taxes imposed  by a State or by any authority within a State.  (2)     Nothing in clause (1)  shall, until Parliament by  law otherwise provides, prevent any authority within  a State from levying any tax on any property of the  Union to which such property was immediately before  the commencement of this Constitution liable or  treated as liable, so long as that tax continues to  be levied in that State.\024

9.     From a perusal of Article 285 it is clear that  no property of  the Union of India shall be subject to tax imposed by the State, save  as Parliament may otherwise provide.  The question is whether \021the  charges for\022  supply of water and maintenance of sewerage is in the  nature of a tax or a fee for the services rendered by the Jal  Sansthan. There is  a distinction between a  tax and  a fee, and hence   one has to see the nature of  the levy  whether it is in the nature of  tax or whether it is in the nature of fee for the services rendered by   any instrumentality  of the State like the  Jal Sansthan. There is no  two opinion  in the matter that so far as  supply of water and  maintenance of sewerage is concerned,  the  Jal Sansthan is to  maintain it  and  it is they who bear all the expenses for the  maintenance of sewerage and supply of water. It has to create its own  funds and therefore, levy under the Act is a must.  In order to supply  water and maintain sewerage system, the Jal Sansthan has to incur the  expenditure for the same. It is in fact a  service which is being  rendered by the Jal Sansthan to the Railways,  and the Railways cannot  take this service from the Jal Sansthan without paying the charges for  the same. Though the expression tax has been used in the Act of 1975  but in fact  it is in  the nature of a  fee for the services rendered  by the Jal Sansthan.  What is contemplated under Article 285 is  taxation on the property of the Union.  In our opinion  the Jal  Sansthan is not charging any tax on the property of the Union;  what  is being charged  is  a fee for  services rendered to the Union  through the Railways. Therefore,  it is  a plain and simple charge for  service rendered by  the Jal Sansthan for which the Jal Sansthan has  to maintain staff for regular supply of water as well as for sewerage  system of the effluent discharge by the railway over their platform or  from their staff quarters.  It is in the nature of  a fee for service   rendered and not any tax on the property of the Railways. 10.           The distinction has to be kept in mind between a tax and a  fee.  Exemption  under Article 285 is  on the  levy of any tax on the  property of the Union by the State,  and exemption is not for charges  for the services rendered by the State or its instrumentality which in   reality amounts to a fee.  In this connection, a reference was made to   the decision of this Court in re Sea Customs Act (1878), S.20(2) [ AIR  1963 SC 1760]. This was a case in which a reference was made by the  President of India with regard to levy of custom and excise duties on  the State under Article 289 of the Constitution of India wherein  Sinha, CJ, Gajendragadkar, Wanchoo and Shah,JJ answered the question  at paragraph 31 as follows :

               \023 (31)               For the reasons given above, it  must be held that the immunity granted to the States

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in respect of Union Taxation does not extend to  duties of customs including export duties or duties  of excise. The answer to the three questions  referred to us must, therefore, be in the negative.\024

11.     But a contrary view was taken by S.K.Das, Sarkar and Das  Gupta,JJ. They concluded in paragraph 71 as follows:

               \023 (71)               For the reasons given above our  opinion is that the answers to the three questions  referred to this court must be in the affirmative  and against the stand taken by the Union. \024

12.     Hidayatullah, J.  answering the question in paragraph 121, held  as follows :

               \023 (121)      My answers to the questions are:

(1)     The provisions of the Art. 289 of the  Constitution preclude the Union from imposing or  authorizing the imposition of, customs duties on  the import or export of the property of a State  used for purpose other than those specified in cl.  (2) of that Article, if the imposition is to raise  revenue but not to regulate external trade.             (2)      The provisions of  Art. 289 of the     Constitution of India preclude the Union from  imposing, or authorizing  the imposition of excise  duties on the production or manufacture in India  of the property of a State used for purposes other  than those specified in cl.(2) of that Article.\024

13.     Ayyangar,J.  has also expressed a separate opinion concurring  with the Chief Justice. This decision on reference of the President of  India only dealt with the question of Article 289 of the Constitution  and we are not concerned in the present case with the effect of  Article 289 which is, so far as the present controversy is concerned,  of no useful assistance.

14.     Learned counsel for the appellant has relied on the decision of  this Court  in Union of India v Purna Municipal Council (supra). In  this case, the Railways challenged the notice of demand issued  by  Purna Municipal Council claiming  Rs.28,400/-  by way of  \021service  charges\022  due for the period  from 1954 to 1960.  The Union of India  made a reference to Article 285 of the Constitution of India read with  Section 135 of the Indian Railways Act, 1890. It is not clear from  this  decision whether the service charge demanded  by the Purna  Municipal Council was in reality a tax on the property of the Union or  a charge for  some service rendered, rather the  decision proceeded on  the  assumption that it was a tax and not a fee.  The Court disposed  of the matter holding as follows:

               \023  The interplay  of the constitutional and  legal provisions being well cut and well defined  requires no marked elaboration to  stress the point.  Accordingly, we allow this appeal, set aside the  judgment and order of the High Court  and issue the  writ and direction asked for in favour of the  Union  of India restraining the respondent council from

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raising demands on the railway in regard to service  charges. We make it clear that the rights of the  local authority as flowing under Section 135 of the  Indian Railways Act, 1890 stand preserved in the  event of the Central Government moving into the  matter, if not already moved. In the circumstances  of the case, however, there will be no order as to  costs.\024

15.     From this it is not clear whether the impugned demand was a  charge for some service rendered, such as that  which is involved in  the present case with regard to water supply or with regard to  sewerage. As already pointed out, what is prohibited by Article 285 is  taxation on the property of the Railways and it does not prohibit  charge of a fee  on account of some service rendered by the local  bodies   or instrumentality of the State like supply of water or  maintenance of sewerage. Such a charge would be in the nature of a fee  and not a tax.  16.     The other decision which has been heavily relied on by the  appellants in Ranchi Municipal Corporation, Ranchi & Ors. (supra). In  this case, their Lordships merely followed the decision in Purna  Municipal Council (supra) and  disposed of the matter. Again the  question is what was the nature of the demand raised by the State  against the Railways. In this case, their Lordships after following  the judgment in Purna Municipal Council (supra)  observed as follows :

               \023 Therefore, it cannot be construed that there  is any contract between the Union of India and the  Municipality. In view of the fact that the  Municipality has no right to demand service charges  from the Union of India, the demand made by the  Municipality is clearly ultra vires its power.  It  is true that earlier WP No.2844 of 1992 was filed  and was dismissed by the High Court and the special  leave was refused by this Court on the ground of  gross delay.\024

       It was also observed at paragraph 5 as follows :

               \023 It is now settled law that the summary  dismissal does not constitute res judicata for  deciding the controversy. Moreover, this being a  recurring liability which is ultra vires the power,  earlier summary dismissal of the case does not  operate as a res judicata. \024

17.     Therefore, from the perusal of these two decisions what emerges  is that no property of the Union of India can be subjected to State  taxation,  but these decisions do not deal with a charge for services  rendered by any State or an instrumentality of the State.  In this  connection, our attention was invited to a decision of this Court in  New Delhi Municipal Council v. State of Punjab & Ors. [ (1997) 7 SCC  339]. This was also a case where Articles 289, 246(4), 245(1) and  1(2), 3(b) and 285 came up for consideration. As per the majority it  was held that  levy of property tax on such lands / buildings which  are not used or occupied for the purpose of any trade or business  carried on by the State Government with profit motive was invalid and  incompetent by virtue of Article 289(1).  But if the levy is on lands/  buildings used or occupied for  any trade or business carried on by or  on behalf of the State Governments, then by virtue of Article 289(2),  the levy would be valid. It was also observed that  it was for the  authorities  under the enactments to determine with notice to the  affected State Governments, which land or building is used or occupied  for the purposes of any trade or business carried on by or on behalf

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of the State Government.  As against this, the minority view  was that   the States are entitled to exemption from levy of property tax on  their lands/ buildings  situated within NCT including those occupied  for trade or business purposes. This case also does not throw any  light on the question whether the services which are being given by  the State Government or its instrumentality or the local bodies like  supply of water and maintenance of sewerage  will have the exemption  under Article 285 of the Constitution ? This was also a case  with  regard to levy on the property of the State. So far as we are  concerned in the present case, there is no levy on the property of the  Union of India. Therefore, this case also does not provide us any  useful assistance.  As against this,  our attention was invited to a  subsequent decision of this Court in Municipal Corporation, Amritsar  v. Senior Superintendent of Post Offices, Amritsar Division & Anr.  [(2004) 3 SCC 92]. In this case, their Lordships were directly dealing  with charges for the water supply, street light, drainage  services   being rendered to P & T Department\022s buildings  situated within the  Municipal limits.  In that context, their Lordships held as follows :

               \023  The demand so made was with regard to the  services rendered to the respondents\022 Department,  like water supply, street-lighting, drainage and  approach roads to the land and buildings. In the  counter, the respondents averred that they are  paying for the services rendered by the appellant  Corporation by way of water and sewerage charges and  power charges separately. It is also categorically  averred that no  other specific services are being  provided to the respondents for which the tax in the  shape of service charges can be levied and realized  from the respondents. There is no provision in the  Municipal Corporation Act for levying service  charges. The only provision is by way of tax.  Undisputedly, the appellant Corporation is  collecting the tax from general public for water  supply, street-lighting and approach roads etc.  Thus, the \023tax\024 was sought to be imposed in the garb  of \023service charges\024. The interplay of the  constitutional and legal provisions being well cut  and well defined,  it was clearly not within the  competence of the Corporation to impose tax on the  property of the Union of India, the same being  violative of Article 285(1) of the Constitution. \024

18.     In this case, what is clear is that in fact the  P & T Department  was paying for water supply and sewerage separately and it was over  and above that some service charges were levied under the garb of  service charges  which was exempted  by the Constitution. In the  present case,  what is being charged is in fact water supply and  sewerage.  Therefore, so far as this part is concerned,   it is  affirmed by this Court in the aforesaid decision.  But what is not  accepted was that over and above the charges  for  supply of water and  sewerage and power charges, the Municipal Corporation was levying  service charges which were not contemplated under the Municipal  Corporation Act for levying such service charges. Therefore,  indirectly  so far as demand for water supply, sewerage was concerned,  it was accepted by the P & T Department  and they were paying  the  same to the Municipal Corporation.  

19.     Our attention was invited to another decision of this Court in  Sona Chandi Oal Committee & Ors. V. State of Maharashtra [ (2005) 2  SCC 345]. In this case,  the question was whether levy of inspection  fee for renewal of moneylender\022s licence was valid or not.  Their

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Lordships held  that fee charged is regulatory in nature  to further  the objects of the Act and it has nexus with  services rendered to  moneylenders.  However, it was observed that service to be rendered is  not a condition precedent and there should be reasonable relationship  between levy of fee and services rendered and in that context, their  Lordships affirmed the validity of  levy of fee under the Bombay  Money-Lenders Act, 1946.  20.     Our attention was also invited to a decision of this Court in  Vijayalashmi Rice Mill & Ors. V. Commercial Tax Officers, Palakol &  Ors. [ (2006) 6 SCC 763]. In this case, their Lordships considered the  distinction between fee, cesses and taxes. Their Lordships held that  ordinarily  a tax generates general revenue not for any service  rendered. However, the nomenclature is not important. Sometimes a  \021tax\022  may be in reality a fee,  depending upon its nature. It was  observed that the earlier concept  of fee has undergone a sea  change  and rendering of some specific service to a particular payer of fee is  no longer considered necessary to sustain the levy of fee provided  there is a broad and general correlationship between the totality of  the fee imposed and the totality of the expenses on the service  rendered. This discussion makes it clear that the distinction between  a tax and a fee remains, even though the concept of a fee has  undergone a sea change.  21.      A reference was also made to another decision of this Court in  Karya Palak Engineer, CPWD, Bikaner v. Rajasthan Taxation Board, Ajmer  & Ors. [(2004) 7 SCC 195]. In this case, a three Judge Bench held that  Article 285 which contemplates exemption of Union property from State  tax, does not extent to exemption from levy of indirect tax. In this  case, the question was exemption of sales tax in a works contract for  erection of barbed wire. CPWD  in terms of the contract supplied the  construction materials   after purchasing the same on payment of  consideration and was adjusting the  value of the materials in the  final bills of the contractor.  The question was whether there was  immunity for the property of the Union from the State taxation under  Article 285.  Their Lordships held that from the case law it is clear  that the Union is not exempted from the levy of indirect tax under  Article 285.  Their Lordships after examining the decision in re Sea  Customs Act (1878) S.20(2) (supra) in reference by a nine Judge Bench  observed that Article 285 is a mandate and not indirect tax such as  sales tax. Their Lordships concluded  with reference to sales tax   which reads as follows :

               \023  We may in this connection contrast sales  tax which is also imposed with reference to goods  sold, where  the taxable event is the act of sale.  Therefore, though both excise duty and sales tax are  levied with reference to goods, the two are very  different imposts; in one case the imposition is on  the act of manufacture or production while in the  other it is on the fact of  sale. In neither case  therefore can it be said that the excise duty or  sales tax is a tax directly on the goods for in that  event they will really become the same tax.\024

22.     The aforesaid decision came up consideration in New Delhi  Municipal Council (supra). Their Lordships concluded at paragraph 16  as follows :

               \023  From the above judgment  of this Court, it  is clear that the Union is not exempted from the  levy of indirect tax under Article 285 of the  Constitution. The above discussion also shows that  reliance placed on the judgment of this Court in the  case of New Delhi Municipal Council by one of the  learned counsel for the appellants is wholly  misconceived and is opposed to his contention with

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reference to Article 285 of the Constitution.\024

23.     Though these observations were in reference to Sales Tax Act but  the reasoning equally  applies in this case also. In this case what is  being charged is for  service rendered by the Jal Sansthan i.e. an  instrumentality of the State under the Act of 1975. Section 52 of the  Act states that the Jal Sansthan can levy tax, fee and charge for  water supply and for sewerage  services rendered by it as water tax  and sewerage tax at the rates mentioned therein.  Though the charge   was loosely termed as \021tax\022 but  as already mentioned before,  nomenclature is not important. In substance what is being charged is   fee for the supply of water as well as maintenance of the sewerage  system. Therefore, in our opinion, such service charges are a fee and  cannot be said to be hit by Article 285 of the Constitution.  In this  context it is to be made clear that what is exempted by Article 285   is a tax on the property of the Union of India but not a charge for   services which are being rendered in the nature of water supply, for  maintenance of sewerage system. Therefore, in our opinion, the view  taken by the Division Bench of the Allahabad High Court is correct  that the charge is a fee, being  service charges for supply of water  and maintenance of sewerage system, which cannot be said to be tax on  the property of the Union. Hence it is not violative of the provisions  of Article 285 of the Constitution.

24.             As a result of our above discussion, we do not find any  merit in this appeal and the same is dismissed. There will be no order  as to costs.