State of UP vs Renusagar Power Co - Explained in Easy Words

State of UP vs Renusagar Power Co. and Ors
Writ Petition (Civil) 3921 of 1982
Date of judgment: 28-07-1988

In this case law, you will learn about the facts, issues, arguments, and judgment of the State of UP and Ors. vs Renusagar Power Co. and Ors.

Introduction
Facts of the Case
Issues Raised
Arguments
Judgment
Critical Analysis
Conclusion

Introduction

The idea of lifting the corporate veil was employed in the case of the State of UP and Ors. vs Renusagar Power Co. and Ors. to determine whether the same person was responsible for generating and consuming the electricity and, if so, whether the corporate veil was lifted in this case.

The question arises because the relation of Hindalco and Renusagar are inseparably or significantly closely tied in this instance. Renusagar had no distinct identity from the Hindalco since they were so inextricably intertwined. Renusagar, unlike Hindalco, was not an autonomous body.

Facts of the Case

Renusagar Power was established by a company named Hindalco, which is in the industrial business of aluminium production. The purpose for which Renusagar was established was to supply electrical power to Hindalco for production.

Even though Renusagar possesses its own articles and memorandum of association as a separate incorporation, it is still controlled by Hindalco. The shareholders for both companies were the same people who were also parties to the suit.

The state of Uttar Pradesh levied electrical duty for a massive amount on Renusagar for providing energy supply to Hindalco for industrial purposes under section 3 of the UP Electrical (Duty) Act, 1952, which states, “Levying of Electricity Duty”:

“The State Government may, in the public interest, having regard to the prevailing charges for supply of energy in any area, the generating capacity of any plant, the need to promote industrial production generally or any specified class thereof and other relevant factors, either fix different rates of electricity duty in relation to different classes of consumption of energy or allow any exemption from the payment thereof.”

Renusagar, under section 3(4) of the UP Electrical (Duty) Act, 1952, filed an application to the state government asking for exemption on duty as the activities carried by them were done in the interest of the public as per the provision mentioned above.

The state government rejected their application multiple times and gave different reasons for not granting the exception. This rejection by the state government resulted in the respondent’s constant aggravation, so they approached the High Court by filing a writ petition.

The High Court allowed the writ petition and held that the state government’s orders were impugned and not maintainable in law. The High Court asked the state government to reconsider their exemption application again concerning the direction issued by them. And now the petitioners were aggrieved (unhappy) by the judgment given by the High Court, and because of this, the state government filed a special leave petition in the Supreme Court of India, which sought relief.

Issues Raised

There were two major issues raised in this case:

Whether Renusagar’s generation of power will be considered as its own source of power for Hindalco as per section 3(1)(c) of the UP Electrical (Duty) Act, 1952, and are they obligated to pay the electrical duty?
Whether the corporate veil must be pierced to ascertain whether they are eligible for exemption from electricity duty under section 3(4) of the UP Electrical (Duty) Act, 1952.

Arguments

These were the arguments advanced by both appellants and respondents.

Arguments Given by the Appellants

The two companies are distinct entities with separate legal entities, and their revenues and balances are computed and reported differently. As a result, there is no need to pierce the corporate veil because there is no legal or factual reason to believe that the Renusagar plant is Hindolca’s sole source of energy.

Even though the parent company owns the subsidiary company entirely for tax reasons, they are still recognized as two distinct legal entities. In addition, the corporate veil should be lifted when the company is established to avoid legal requirements.

Arguments Given by the Respondents

1. The state government guaranteed that a sufficient and constant supply of electricity would be provided at a cheap rate for the production of aluminium. Since electricity served as a raw material for the production of aluminium, respondent no. 2 (Hindalco, short for M/s Hindustan Aluminium Corporation Ltd.) decided to set up the aluminium plant.

2. On agreeing to the following guidelines below, respondent no. 2 was allowed to expand the plant’s size:

The respondent itself should install the aluminium plant.
The state government has the right to take over the said plant.
Therefore, a 100% owned subsidiary was established by respondent number 2 to supply electricity exclusively to him, preventing any complications from arising in the event of a takeover.

3. The licenses introduced in the Indian Electricity Act of 1910 are unassociated with respondent no. 1 (Renusagar Power Company Ltd.) and are bound to solely supply electricity to respondent no. 2, which means that he is not an independent entity but a confined source. Hence, the sanctions provided to respondent number 1 are different.

4. All three clauses of section 3(1) of the UP Electrical (Duty) Act, 1952, must be read harmoniously. If any contradistinction is made, it will prove to be ridiculous, further violating equality before the law that is Article 14 of the Constitution of India. Hence, section 3(1)(a) and section 3(1)(c) of the UP Electrical (Duty) Act, 1952, must not clash but preserve each other’s motives.

5. Lastly, respondent number 1 must be pleaded as the alter ego of respondent number 2. As per section 3(1)(c) of the UP Electrical (Duty) Act, 1952, respondent no. 2 has his own source of power.

Judgment

The Supreme Court upheld the High Court’s judgment in lifting the corporate veil. The court stated the appellants were at fault for not treating respondent no. 2 as the parent company of respondent no. 1, that is, Renusagar, the subsidiary of Hindalco, which provided its “own source of a generation.”

The court held that, given the facts of the case, lifting the corporate veil was the right move.

Further, Renusagar and Hindalco are to be seen as one unit, and so forth; the usage of electricity by Hindalco is to be seen as the consumption of power from its “own source of generation.”

While dismissing the appeal, the court ordered the state authority to regard the company’s true owner while imposing the duty.

Critical Analysis

The doctrine of the lifting of the corporate veil, as first exercised in the Salomon vs Salomon case and for the first time in India in the case of LIC vs Escort Limited, is a principle that helps the courts look beyond the standard structure of the company by breaking its corporate shell and take action as if no separate personality existed from their shareholder, making the persons controlling the company accountable for their wrongful actions.

To solve the issues at hand, the courts first looked into the relationship between the two companies, namely Renusagar and Hindalco:

They first emphasized how the condition of power generation was fulfilled; apparently, Hindalco made Renusagar for supplying power to expand their business of aluminium production.
The fact that Renusgar was wholly owned and controlled by Hindalco makes it the parent company. Therefore, the latter was taking part in the company’s daily affairs and industrial production decisions.
The fact that, at no point in time, Renusagar indicate any independent choice from its parent company.

These three observations imply that Renusagar and Hindalco, though separate legal entities, share the relationship of a parent-subsidiary agency. After lifting the corporate veil, the two companies are indeed under one concern, and the fact that Renusagar is providing electrical power to Hindalco is to be treated as producing electricity from its own source. Based on the abovementioned things, they will be liable to pay the electricity duty levied on them.

Coming to the issue of whether they will be granted the exemption or not, the answer is yes; they will be awarded the exemption, as it is well established that after lifting the corporate veil and not considering the identities of the two companies as separate, they will be eligible to get an exemption (from electricity duty) under section 3(4) of the UP Electrical (Duty) Act, 1952.

However, this provision does not define the exact extent of the power of the state government regarding this provision.

Hindalco’s subsidiary company, Renusagar Power, was wholly owned by Hindalco. Hindalco used the electricity of its subsidiary company, and like this, it availed the advantage of the reduced rate of electricity duty under the UP Electricity (Duty) Act, 1952.

Though Renusagar and Hindalco continued to have separate legal existences even after the judgment was passed, even after lifting the corporate veil, their different legal identities were not discarded by their directors or shareholders.

One of the crucial points to note here is that we know that parent companies create subsidiaries to escape liability or tax exemption, but parent company assets can be subject to the liabilities of the subsidiary; thus, piercing the corporate veil would be applied.

In this case, piercing the corporate veil played to the advantage of Hindalco. Based on the court’s reasoning, they got the exemption on electricity duty after the piercing.

Conclusion

It is concluded that the Supreme Court was perfectly correct in partially quashing the High Court’s ruling. However, the corporate veil should be raised in this instance because it is in the interest of justice, and it is the court’s duty to serve justice.

Furthermore, the entire situation demanded an explanation since the state government was already treating the subsidiary company as part and parcel of the parent company by shutting off power and other services but was unwilling to acknowledge the same on paper. So, in such instances, the judiciary must determine what is required of the hour, and in this case, there was definitely a need.

Also, the executive has a significant responsibility to maintain a balance between the interests of companies and the interests of the general public. The executive is found to do so because the executive cannot make decisions based solely on the interests of one party; instead, the executive must consider both interests. Companies must make sacrifices when the public interest is at the centre of any action because the legislature will favour the public.

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Gayatri Singh

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Gayatri has written this article. She is a law student at UPES Dehradun. Her passion lies in writing and literature. She is a highly motivated and energetic individual who wishes to help India advance in the legal field.