Ltd. Vs. Municipal Corporation of Delhi & ANR  INSC 654 (8 August 1997)
V. MANOHAR, M. JAGANNADHA RAO
1270-1294/1987, 1298/1987, 4408/1995, 1300- 1303/1987 & 11765-11800/1995]
V. Manohar, J.
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.
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
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.
other method of charging decided by the undertaking shall also be
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 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.
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.
The actual cost of energy purchased shall be the amount paid in rupees for
import of energy for that period.
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.
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
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
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.
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.
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.
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 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
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 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.
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.
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.
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
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
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.
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 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)
hrs. generated 1593.194 1313.179 (Million Kw hrs.)
Auxiliaries 137.661 129.541 consumption
Generation 1455.533 1183.638
hrs. Purchased 548.267 1613.019
Generation & 2003.800 2796.657 Purchase (3 + 4)
Transmission and 277.539 424.499 Distribution losses
Units sold (5 -6) 1726.261 2372.158 (million Kw hrs.)
Cost of Fuel (Rs. in lakhs) 1637.95 2443.86
Cost of Power purchases 1024.98 4301.60 (Rs. in lakhs)
Total 8 + 9 Rs. (lac) 2662.93 6745.46
Fuel & Purchase cost per 15.43 28.44 unit (10+7) (Paise)
Round up for Tariff base 15.25 15.25
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
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.
which are sold are clearly units generated plus purchased, less units lost in
transmission and distribution.
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.
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.
is how the formula has been worked throughout. In fact the figure of basic
average fuel and purchase cost of 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.