Holding

In the absence of any statutory scheme, the Government may fix royalty rates, including using replacement cost and a sliding scale, and judicial scrutiny is limited to preventing arbitrariness, leading to dismissal of the appeals.

Summary

The Andhra Pradesh Government entered into long‑term supply agreements with paper mills and fixed royalty rates for forest produce, initially at fixed amounts and later by a sliding scale based on replacement cost. The mills challenged the increase from Rs.60 to Rs.210 per tonne and the use of a sliding rate, arguing that it was arbitrary, amounted to a tax without statutory authority, and violated Article 14. The Supreme Court examined whether price fixation, not governed by any statute, is subject to extensive judicial review and whether the replacement‑cost method and sliding rates are permissible. It held that where no legislative scheme prescribes the criteria, the executive may determine rates considering public interest, ecology, revenue and other factors, and the courts' scrutiny is limited to checking for arbitrariness. The Court found the Government's method reasonable, fair and realistic, and dismissed the appeals.

Issues considered

Whether the fixation of royalty rates for forest produce without a statutory framework is amenable to judicial review under Article 14.
Whether the Government can increase royalty rates annually within a five‑year period by a sliding scale.
Whether replacement cost is a valid criterion for fixing royalty rates.
Whether the increase in royalty rates amounts to a tax levied without legislative authority.
What is the scope of judicial scrutiny when price fixation is not governed by a statute or statutory order.

Subjects

Administrative lawPrice fixationRoyalty ratesForest produceReplacement costSliding scaleJudicial reviewArticle 14Arbitrariness

Judgment

MIS. RAYALSEEMA PAPER MILLS LTD. AND ANR. A
v.
GOVERNMENT OF A.P. AND ORS.

OCTOBER 25, 2002

B
--~

[V.N. KHARE, ASHOK BHAN AND S.B. SINHA, JJ.)

Administrative law:

Judicial Scrutiny-Scope of-Determination of rates ofroyalty for supply
offorest produce to paper mills by Government-When not governed by any C
statute or a statutory order--Government fixing royalty rates on supply of
wood to paper manufacturers in the State, later on revising the same-Challenge
rejected -On appeal held the scope of judicial scrutiny would be far less
where the price fixation is not governed by the statute or a statutory order-
It is open to the Government to fix such price as it thinks appropriate having D
regard to public interest-Since Government considered the report of the
committee and adopted a method or determined the price, the fixation of rates
of royalty reasonable, fair and realistic.

Respondent-Government entered into an agreement with paper mills
for supply of certain specified quantity of wood each year for a period of E
20 years. Government supplied hard and soft wood to paper
manufacturers at concessional rate which were fixed every five years. In
1975, Government fixed royalty rates for supply of wood at Rs. 30 per
tonne for barked hard wood and Rs. 60 per tonne for barked soft wood
for the period 1975-1980. Then in 1980 it appointed a Committee for
fixation of revised royalty rates. On the basis of the recommendations of F
the committee and several other factors, it fixed royalty at a sliding rate
with annual increases limited to the prevailing rate of interest instead of
fixing a uniform flat rate for the entire five-year period. The rates of
royalty for bamboo went up from Rs. 60 to Rs. 210 per metric tonne and
rates continued to rise with each passing year. Appellants challenged the G
fixation of rates of royalty. The same was rejected. Hence the present
appeals.

Appellants contended that respondent-Government could not
increase the rate from Rs. 60 to Rs. 210 per metric tonne; that even if
323 H
324 SUPREME COURT REPORTS [2002] SUPP. 3 S.C.R.

A conceding that Government could revise the rates after every five years,
it could not stagger the rates of royalty over the period, thus, giving an
increase for every subsequent year within the same quinquennium which
amounted to increase of rates of royalty for every year instead of being
after every five years; that the replacement cost should not be the criteria
B for fixing the rates of royalty; and that Government could not fix sliding
rates.

Dismissing the appeals, the Court

HELD I.I. Where the matter is governed by a statute or a statutory
C order, the scope of judicial enquiry is limited. The scope of judicial scrutiny
would be far less where the price fixation is not governed by the statute
or a statutory order. Where the legislature has prescribed the factors
which should be taken into consideration· and which should guide the
determination of price, courts would examine whether the considerations
for fixing the price mentioned in the statute or the statutory order have
D been kept in mind while fixing the price and whether these factors have
guided the determination. Courts would not go beyond that point.
(331-E; 333-A-B)

Union of India and Anr. v. Cynamide India Limited and Anr., (1987) 2
sec 720, referred to.
E
1.2. In the instant case, there is no law, or any statutory provision
laying down the criteria or the principles which must be followed, or which
must guide the determination of rates of royalty for supply of forest
produce to paper mills. No doubt, any arbitrary action taken by State
would be subject to scrutiny by courts because arbitrariness is the very
F antithesis of rule of law. But this does not mean that this Court would act
as an appellate authority over the determination of rates of royalty by
Government. Government is the owner of the products. While it had
agreed to supply a particular quantity every year for specified period, it.
had never agreed to supply at a particular rate; nor did it stipulate with
G the mill owners the basis upon which it would determine the rates of
royalty. '1t is open to the Government to fix such price as it thinks
appropriate having regard to public interest, which may include interest
of revenue, environmental, ecology, the need of mills and the requirements
of other consumers. (333-C-E)

H 2. The Committee made recommendations indicating an over all rate
RAY ALSEEMA PAPER MILLS LTD. v. GOVT. A.P. 325
of Rs. 284 per metric tonne for bamboo and Rs. 135 per metric tonne for A
hard,~o~ as the rates ~f royalty for the next five years beginning from
1980. Government appointed a Committee of experts which took into
consideration the status of the paper industry in the country and in the
State, it went into the question of fixation of rates of royalty in detail, it
examined the various alternative methods for fixing the rates of royalty B
and then adopted/accepted the 'regeneration' or 'replacement' cost of the
wood as the reasonable criteria for fixing the rates of royalty. Government
thereafter considered the report and accepted the same. Thus, it cannot
be said that the method adopted or the price determined was either
arbitrary or unreasonable. It seems to be reasonable, fair and realistic and
keeping in mind the requirement of the wood for the future generations. C
(336-G, H; 337-A-Cj

3. Not only can the replacement cost be the criteria for fixing the
rates of royalty, but the State can fix the price keeping in mind several
other factors, like public revenue, ecology and environment, availability
of forest produce in future, the need of other consumers and some other D
such relevant 1~onsiderations. (337-D)

4. The contention that Government could not fix the sliding rates
especially in view of the fact that the rates of royalty for the 1980-85 was
fixed for Rs. 284 per metric tonne for bamboo and Rs. 135 per metric
tonne for hard wood which was reduced to Rs. 210 per metric tonne for E
bamboo and Rs. 100 per metric tonne for hard wood for the base year
1980-81 with gradually increasing at the bank rates for the coming years
cannot be accepted. Since the rates of r1>yalty was reduced for the base
year from the suggested price it shows fairness on the part of State
Government in dealing with appellants. This was done for the benefit of p
appellants and perhaps at their instance. (337-F, HJ

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 7519-7520
of 1995.

From the Judgment and Order dated 23.11.89 of the Andhra Pradesh G
High Court in W.P. No. 3927/87 and W.A. No. 591 of 1984.

WITH

C.A. Nos. 7521-22, 7523-24, 7525-7526 of 1995.
H
326 SUPREME COURT REPORTS [2002) SUPP. 3 S.C.R.

A Kailash Vasdev, G.L. Sanghi, Shanti Bhushan, M.N. Rao, Mrs. V.D.
Khanna, S.S. Shandilya, Shri Narain, Sandeep Narain, Rahul Ray, Umesh
Kr. Khaitan, A.T. Patra, O.P. Khaitan, Raj Panjwani, Vijay Panjwani,
Iqbal Shamsi, T.V. Ratnam and K. Subba Rao for the appearing parties.

The }udgment of the Court was delivered by
B
BHAN, J. I. These sets of appeal arise from a common judgment of
the Division Bench of the High Court of Judicature at Andhra Pradesh whereby
the said High Court has rejected the appellants' challenge to the fixation of
rates of royalty on bamboo and hardwood to the paper industry in Andhra
Pradesh. For the sake of convenience, we would refer to the facts and
C contentions in Civil Appeal,Nos.7519-20 of 1995 arising from Writ Appeal
No. 591 of 1984 and Writ Petition No.3927 of 1987 filed by Sree Rayalaseema
Paper Mills Ltd. It was stated by the counsel for both the parties before us,
as was done before the High Court, that these appeals can be taken as
representative of the facts and contentions in all the appeals.
D
2. Relevant facts for determining the points raised in these appeals are:

Till the year 1975 there were only two Paper Mills in the State of
Andhra Pradesh, namely, (I) Sirpur Paper Mills, and (2) Andhra Pradesh
Paper Mills Ltd. to which the Government was supplying hard and soft wood
E for manufacture of paper at concessional rates·. These rates were being fixed
every five years. By a memorandum dated 2nd September, I 975 the
Government of Andhra Pradesh in Forest and Rural Development Department,
fixed royalty rates at Rs. 30 per tonne for barked hardwood and Rs. 60 per
tonne for barked softwood for a period of 5 years commencing from 1-10-
1975. The Chief Conservator of Forests was requested to get the agreement
F drafted and furnish to the Government for approval after enquiring into the
needs of the mills and after locating the areas in consultation with the mills
for the supply of hard and soft wood. The duration of agreement was to be
for 20 years. Pending the finalisation of the agreement, the Chief Conservator
of Forests was requested to allow the mills to have the wood on payment of
G royalty, as indicated above, on adhoc basis after obtaining an undertaking
from the mills that they would abide by the conditions prescribed by the
Government for the supplies to be effected.

3. Another factor which needs to be mentioned although not relevant
for the purpose of these appeals is that on a representation made by
H Rayalaseema Paper Mills Limited and Bhadrachalam Paper Boards Limited
RA YALSEEMA PAPER MILLS LTD. v. GOVT. A.P. [BHAN, J.) 327
which were set up in a backward area, Government of Andhra Pradesh by A
G.O.Ms. No.665 dated 15th July, 1976, a further concession in the rate of
royalty on bamboo and hard wood by 50% was extended to these two mills
for a period of 5 years from the date of their going into production. On a
further request made by them the period of concession was extended from 5
to I0 years subject to the condition that Government reserved its right to B
review the position after first 5 years. This concession commenced from
I. I0.1978. Concessional period of first five years expired on 30th September,
1983. The Government of Andhra Pradesh reviewed the matter and issued
orders contained in G.O.Ms. No.65 dated 9.2.1984 withdrawing the said
concession altogether w.e.f. 1.10.1983. G.0.Ms. No.65 dated 9.2.1984 was
challenged by filing writ petitions which were dismissed by the single Judge C
of the High Court. Further appeal filed before the Division Bench was also
dismissed. However, it was held that the said G.O.Ms. being administrative
in character, could not be given retrospective effect. This judgment became
final between the parties.

4. To continue with the facts from the previous paragraph the rates of D
.. royalty fixed by the Government Memorandum dated 2.9.1975@ Rs. 60 per
Tonne for barked soft including Bamboo and Rs. 30 per Tonne for barked
hard wood were valid for the period 1-10-1975 to 30th September, 1980. The
Government desired to fix revised royalty rates for the next five years. It
appears that the Chief Conservator ofForests submitted proposals in February E
and June, 1980 suggesting a rate of Rs. 425 per Metric Tonne for bamboo
and Rs. 75 per Metric Tonne for mixed hardwood for supply to Paper Mills.
He based his figures on the minimum cost of production as per policy accepted
by the Central Board of Forests. The Government, however, appointed a
Committee of officials to consider the factors relating to fixation of royalty F
rates on the forest produce to be supplied to wood b.ased industries on a
sustained basis, and to make recommendations to the Government. The
Committee consisted of

I. Secretary to Government, Forests & Rural Development
Department (Chairman) G
2. Joint Secretary, Industries and Commerce Department (Member),
3. Deputy Secretary, Finance & Planning (Member),
4. Managing Director, A.P. Forest Development Corporation
(Member), and
H
328 SUPREME COURT REPORTS (2002) SUPP. 3 S.C.R.

A 5. Chief Conservator of Forests (Member/Secretary).

5. The Committee called upon the wood-based industries for such
information, as they liked, for consideration of the committee. After looking
into the material supplied by the Mills and other material gathered by it, and
after examining the several alternative methods for determining the price of
B forest produce, the committee was of the opinion that the cost of regeneration
be taken to be the price at which the forest produce shall be supplied to these
industries. On this basis, it opined that for the five year period commencing
from I.I 0.1980, the rate of royalty for bamboo may be fixed at Rs. 284 per
Metric Tonne and for hardwood at Rs. 135 per Metric Tonne. The Committee
C further recommended that instead of fixing a uniform flat rate for the entire
5 year period, it would be desirable to fix royalty at a sliding rate with annual
increases limited to the prevailing rates of interest. The Government accepted
the recommendations of the Committee and accordingly issued G.O.Ms.
No.538 dated 4.11.1981. It directed that the "rates for royalty on the forest
raw materials, namely, the bamboo and the hardwood which are to be supplied
D to the wood based industries shall, with effect from the base year 1980-81 be
as follows:

Year (Bamboo per M.T. Hardwood per M.T.
w.e.f. 1.10.1980) (w.e.f. 1.4.1980)

E 2 3

1980-81' 210 JOO

1981-82 233 111

F 1982-83 258 123

1983-84 287 137

1984-85 318 . 152 ........ ".

G In paragraph 6 of the said G.O., the Government stated:-

"6. The Committee has also envisaged that the arrangements should
be worked out to ensure that adequate funds are provided for raising
pulpwood plantations and for improving the management of forests
for sustained supply to the industries. Accordingly, the Government
H have to decide to create the 'Industrial Plantation Fund' from out of
RA YALSEEMA PAPER MILLS LTD. v. GOVT. A.P. [BHAN, J.) 329

the additional royalty revenues revised annually to meet the said A
requirements."

6. As per this G.O., the rates of royalty for bamboo suddenly went up
from Rs. 60 to Rs. 210 per Metric Tonne and the rates continued to rise with
each passing year. However, so far as Rayalaseema Paper Mills and
Bhadrachalam Paper Boards Limited were concerned, they were entitled to B
50% concession for a period of five years commencing from I. I 0.1978. It
was liable to pay only half of the said royalty rate. The five year concession
period expired on 30th September, 1983. It was not extended further as
indicated earlier in para No.3 of this judgment.

7. The validity of G.0.Ms No.538 dated 4.11.1981 was challenged by C
filing writ petitions on two grounds:

(i) by an executive order the Government cannot enhance the rate$
of royalty for purposes of developmental activities of the State.
Such an enhancement amounts to levy of tax, arid no tax can be D
levied except under a Statute; and
(ii) the increase in the rates of royalty contrary to agreement is
unreasonable.

8. On behalf of the State preliminary objection was raised with respect
to the maintainability of the writ petitions. It was submitted that the revision E
in the rates of royalty had been made in accordance with the conditions of
the agreement entered into between the parties and that, in such a case,
Article 14 of the Constitution has no application.

9. The single Judge upheld the preliminary objection and held that
where there was a concluded contract, Article 14 could not be invoked, even F
though one of the contracting parties was the Government. On this ground
alone all the writ petitions except the writ petition No.1641 of 1982 filed by
A.P. Rayans Limited were ordered to be dismissed. So far as the writ petition
No.1641 of 1982 is concerned, the learned Judge found that the facts of that
case were different inasmuch as the original period of five years in its case G
had not expired and the Government could not increase the rates before the
expiry of five years stipulated in the Gov~rnment G.O. It was left open to the
Government to revise the rates or apply the rates contemplated in G.0.Ms.
No.538 dated 4.11.1981 to A.P. Rayons Limited as well after the expiry of
five years from the date the agreement was entered upon.
H
330 SUPREME COURT REPORTS [2002) SUPP. 3 S.C.R.

A I 0. Single Judge had disposed of the writ petitions by a common
judgment. Appellants being aggrieved filed writ appeals. In writ appeals the
appellants did not question the correctness of the judgment of the Single
Judge, in so far as it held that the enhancement of royalties did not amount
to levy of tax. Counsel, however, disputed the correctness of the other findings
B including the finding regardihg the maintainability of the writ petiti'ons. The
Division Bench upheld the objections raised by the appellants regarding the
maintainability of the writ petitions and held that the writ petitions were
maintainable and proceecled to examine the matters on merits. During the
pendency of the writ appeals, the Government further revised the rates for the
next quinquennium started from 1985-86 to 1989-90 by issuing G.O.Ms.
C No.378 ..dated 12th September, 1985. Appellants filed writ petitions which
were admitted and ordered to be disposed of with the writ appeals challenging
the order of the Single Judge for the earlier quinquennium from 1980 to 1985
upholding the G.0.Ms. No.538 dated 4.11.1981.

11. On merits the Division Bench examined the dispute between the
D parties in great detail. After examining tfle report submitted by the Committee
and the order passed thereon by the Government rejected the contentions of
the covnsel appearing for the appellants to the effect that what was sold to
the appellants natural growth (bamboo), replacement cost should not be the
criteria for fixing the rates of royalty. It was held that not only can the
E replacement cost be the criteria, but the State could also fix the price keeping
in mind several other factors, like, public revenue, ecology and environment,
availability of forest produce, the need of other consumers and even to compel
the mills to turn to alternative raw materials. That the State could not be
called upon in the absence of any law laying dawn the criteria for fixing the
rates of royalty, to account for the manner in which, or the basis upon which
F the State has to determine the royalty as explained in the reasoning of the
said judgment.

12. Shri Shanti Bhushan, learned senior counsel appearing for the
appellants did not dispute the propositions that price fixation is neither the
function nor the forte of the court, it is neither concerned with the policy nor
G the rates. But the Court cannot deny to itself to jurisdiction to enquire into
the question, in appropriate proceedings, whether relevant consideration have
gone in and irrelevant considerations kept out of the determination of the
price. Referring to the facts of the present cas~; it was contended that the
Government, in an arbitrary and in unrealistic manner, unmindful of the
H question of survival of the paper industries, could not increase the rates 5
RAY ALSEEMA PAPER MILLS LTD. v. GOVT. A.P. [BHAN, J.) 331
times from Rs. 60 to Rs. 210. Public interest demands that the paper industries A
should be kept alive. In such a situation, fixation of an 'impossible' price,
which the mills cannot bear, would be an unreasonable and arbitrary act on
the part of the Government requiring the stepping in of the courts. Such an
act would be adverse to the public interest and totally arbitrary. It was further
contended that even if conceding that the government could revise the rates B
after every five years, it could not stagger the rates of royalty over the period,
thus, giving an increase for every subsequent year within the same
quinquennium which amounted to increase of rates of royalty for every year
instead of being after every five years. That because of the arbitrary increase
in price some of the mills have become sick and unviable. Counsel appearing
in the other appeals supplemented these two basic submissions of Shri Shanti C
Bhushan.

13. We now proceed to examine these contentions.

14. Before we enter the discussion, it is made clear that the determination
of rates of royalty for supply uf forest produce to paper mills is not governed D
by any statute or a statutory order. The Government while entering into the
agreement with the paper mills had undertaken to supply a certain specified
quantity of wood each year for a period of 20 years. The government had not
assured the mills that it will supply bamboo and other forest produce required
by them at a pa11icular rate. Nor was there an agreement between them with E
respect to the manner in which the rates of royalty would be determined.
There was no assurance that the mills would be consulted or associated while
fixing the rates of royalty. Even where the matter is governed by a statute or
a statutory order, the scope of judicial enquiry is limited. This Court in Union
of India and Anr. v. Cynamide India limited and Anr., [1987] 2 SCC 720
examined the scope of judicial interference in the matters of price fixation F
and observed:

"We start with the observation. 'Price fixation is neither the function
nor the forte of the Court'. We concern ourselves neither with the
policy nor with the rates. But we do not totally deny ourselves the G
jurisdiction to enquire into the question, in appropriate proceedings,
whether relevant considerations have gone in and irrelevant
considerations kept out of the determination of the price. For example,
if the legislature has decreed the pricing policy and prescribed the
factors which should guide the determination of the price, we will, if
necessary, enquire into the question whether the policy and the factors H
.~·
332 SUPREME COURT REPORTS [2002] SUPP. 3 S.C.R.

A are present to the mind of the authorities specifying the price. But our
examination will stop there. We will go no further. We will not
deluge ourselves with more facts and figures. The assembling of the
raw materials and the mechanics of price fixation are the concern of
the executive and we leave it to them. And, we will not re-evaluate
the considerations even if the prices are demonstrably injurious to
B some manufacturers or producers. The court will, of course, examine
.if there is any hostile discrimination. That is a different 'cup of tea'
altogether.

The second observation we wish to make is, legislative action,
c plenary or subordinate, is not subject to rules of natural justice. In the
case of parliamentary legislation, the proposition is self-evident. In
the case of subordinate legislation, it may happen that Parliament
may itself provide for a notice and for a hearing-there are several
instances of the legislature requiring the subordinate legislating
authority to give public notice and a public hearing before say, for
D example, levying a municipal rate in which case the substantial non-
observance of the statutorily prescribed mode of observing natural
justice may have the effect of invalidating the subordinate legislation.
; The right here given to rate payers or others is in the nature of a
concession which is not to detract from the character of the activity
E as legislative and not quasi-judicial. But, where the legislature has
not chosen to provide for any notice or hearing, no one can insist
upon it and it will not be pennissible to read natural justice into such
legislative activity.

Occasionally, the legislature directs the subordinate legislating
F body to make 'such enquiry as it thinks fit' before making the
subordinate legislation. In such a situation, while such enquiry by the
subordinate legislating body as it deems fit is a condition precedent
to the subordinate legislation, the nature and the extent of the enquiry
is in the discretion of the subordinate legislating body and the
subordinate legislation is not open to question on the ground that the
G enquiry was not as full as it might have been. The provision for 'such
enquiry as it thinks fit' is generally an enabling provision, intended
to facilitate the subordinate legislating body to obtain relevant
information from all and whatever source and not intended to. vest
any right in anyone other than the subordinate legislating body. It is
H the sort of enquiry which the legislature itself may cause to be made
RAYALSEEMA PAPER MILLS LTD. v. GOVT. A.P. [BHAN, J.] 333
before legislating, an enquiry which will not confer any right on A
anyone."

15. This Court was examining the scope of judicial scrutiny in the
matters of price fixation where it was governed by statutory provisions. The
scope of judicial scrutiny would be far less where the price fixation is not
governed by the statute or a statutory order. Where the legislature has B
prescribed the factors which should be taken into consideration and which
should guide the determination of price, the courts would examine whether
the considerations for fixing the price mentioned in the statute or the statutory
order have been kept in mind while fixing the price and whether these factors
have guided the determination. The courts WO\lld not go beyond that point. C
In the present appeals, there is no law, or any statutory provision laying down
the criteria or the principles which must be followed, or which must guide the
determination of rates of royalty. No doubt, any arbitrary action taken by the
State would be subject to the scrutiny by the courts because arbitrariness is
the very antithesis of rule of law. But this does not mean that this Court
would act as an appellate authority over the determination of rates of royalty D
by the governmen't. Government is the owner of the products. While it had
agreed to supply a particular quantity every year for specified period, it had
never agreed to supply at a particular rate; not did it stipulate with the mill
owners the basis upon which it would determine the rates of royalty. It is
open to the government to fix such price as it thinks appropriate having E
regard to public interest, which interalia, may include interest of revenue,
environmental, ecology, the need of mills and the requirements of other
consumers. The price is not to be fixed keeping in mind the requirements of
the mills alone.

16. We could have ended our enquiry at this point but since the appeals F
were argued at great length and the point was examined by the High Court
as well, we proceed to examine the correctness of the contentions raised by
Shri Shanti Bhushan in tliis regard. G.O.Ms.No.538 dated 4.11.1981 recites
the following facts:

"On a review at the end of the quinquennium 1975-80 in respect of G
the rates of royalty on bamboo and wood, the Chief Conservator of
Forests submitted proposals in February and June, 1980 suggesting
Rs. 425 per MT for bamboo and Rs. 75 per MT for mixed hard wood
to be supplied from natural forest, based on the minimum cost of
production as per the policy accepted by the Central Board of Forestry. H
334 SUPREME COURT REPORTS (2002] SUPP. 3 S.C.R.

A 2. To consider the factors relating to the fixation of royalty rates on
the forest produce to be supplied to the wood based industries on a
sustained basis and to make recommendations to the Government, a
Committee was constituted consisting of:
I. Secretary to Government, Forests & Chairman
B Rural Develop-Men! Department

2. Joint Secretary, Industries & Commerce Member
Department

,,' . Deputy Secretary, Finance & Planning Member
c Department

4. Managing Qirector, A.P. Forest
Development Corpn. Member

5. Chief Conservator of Forests Member/
Secretary
D
The Committee requested each of the wood based industrialists to
present their views. After hearing their views, the Committee also
called for such additional information as they would like to place
before the Committee. The information made available to the
E Committee by the Industrialists was also considered by the Committee.
Besides, the Committee took note of the following relevant factors
relating to the supply of forest raw material for wood-based industries,
namely:-
(i) Forests are no longer naturally renewable resources but have
F been rendered wasted assets due to over-exploitation without
corresponding regeneration, resulting in serious environmental
and ecological imbalance.
(ii) The forest resources in Andhra Pradesh are heavily depleted over
the years resulting in heavy shortages of raw materials for the
G wood-based industries.
(iii) If the raw material is regenerated within the State itself over a
period of time, it will not only ensure sustained supplies but it
will also aid such industries getting part of their supplies now
from distant States to save the heavy transportation cost.
H (iv) To reduce the pressure on reserve forests increasing to almost
RAY ALSEEMA PAPER MILLS LTD. v. GOVT. A.P. [BHAN, .J.) 335
alarming proportions, replacement or regeneration coupled with A
improved management, should be at least as fast as the pace of
exploitation.
(v) The depletion of wood resources due to over exploitation is so
acute that an analysis of the potential for pulp and paper industries
development upto the year 2000 Ad. prepared by the pulp and B
paper Industries Development Programme of the United Nations,
Rome, in February 1980, does not indicate any additional
capacities in Andhra Pradesh, in view of the factthanhe existing
wood resources are already over-strained.
(vi) If raw material supply to the wood-based industry is to be ensured C
on a sustained basis, the depleting trend has to be recovered by
putting back into Nature, what is taken out of it.
(vii) The cost of other inputs in paper manufacture, such as chemicals,
dyes, coal, furnace, oil, etc. over the years, has been on the
increase due to market prices, while the royalty rates on forest D
produce were pegged to law level neglecting the need for adequate
finances to take up plantations for sustained supplies.
(viii)The need for raising new plantations and improved management
of the forest can for heavy investment and the rates of royalty
have to necessarily be adequate to meet the cost and improve E
finances to ensure sustained supply of raw material to wood-
based industries.
(ix) The experience in implementing bankable plantation schemes
refinanced by Agricultural Refinance & Development Corporation
has to be kept in view in fixing the rates of royalty since such F
schemes are financed on long term basis by A.R.D.C. on well
established principles."

17. Reading of G.O.Ms. shows that the government has accepted the
report of the Committee implicitly. It would, therefore, be instructive to
examine the report of the Committee, which is a part of the record. Relevant G
portions of the report of the Committee has been verbatim taken and
reproduced in the G.O. which has been reproduced in the previous paragraph.

I 8. We have gone through the report of the Committee in fixation of
the rates of royalty. The committee took into consideration the status of the
paper industry in the country and in the State of Andhra Pradesh. Thereafter H
336 SUPREME COURT REPORTS [2002) SUPP. 3 S.C.R.

A the Committee proceeded to examine the various alternative methods for
fixing the rates of royalty. It was noted that the Committee did not come
across any norms evolved so far anywhere in the country for determining the
rates of royalty when captive forest resources are offered by the State to the
industry. They referred to a study by the Central Board of Forestry (1973) in
B which the Central Board of Forestry commended the guiding principle as
follows:
\
"The incentive of the produce be kept alive and a proper price be
paid for the raw material which will enable the Forestry sector to
carry out the needed maintenance and improvement of natural forests
C as well as grow plantations which are economically viable from the
point of Forestry Sector."

19. After examining the various methods including the past rates, rates
prevalent in the neighbouring States, administrative cost/expenses on
silvicultural needs, market price, cost of production of paper, replacement
D cost for manmade forest material, market price as royalty etc., it adopted the
method of replacement cost to be the guiding principle for fixing the rates of
royalty. The relevant factors which prevailed with the committee for adopti~g
the regeneration/replacement cost method were detailed in the report which
have been referred to and reproduced by us in this judgment. It would be
noted that the committee came to the conclusion that forests are no longer
E naturally renewable resource but have been rendered wasted assets due to
over-exploitation without corresponding regeneration, resulting in serious
environmental and ecological imbalance. To reduce the pressure on reserved
forests, increas!ng to almost alarming proportions, replacement or regeneration
coupled with improved management, should be at least as fast as the pace of
F exploitation. The forest resources in the State of Andhra Pradesh depleted
over the years resulting in heavy shortages of raw materials for the wood-
based industries. In order to ensure the supply of raw material, on sustained
basis, the depleting trend could be arrested by putting back into nature, what
was taken out of it. After taking into consideration the cost of inputs needed
for raising the new plantations, the cost of other inputs in paper manufacture,
G the need for raising new plantations and improved management of the forest
call for heavy investment and to generate enough resources to meet the cost
and improve finances to ensure sustained supply of raw material to wood-
based industries and the experience in implementing bankable plantation
schemes refinanced by Agricultural Refinance & Development Corporation
H the Committee made recommendations indicating an over all rate of Rs. 284
RAYALSEEMAPAPERMILLSLTD.v.GOVT.A.P.[BHAN. J.) 337

per Metric Tonne for bamboo and Rs. 135 per Metric Tonne for hard wood A
as the rates of royalty for the next five years beginning from 1980. The rates
of royalty of Rs. 284 per Metric Tonne for bamboo and Rs. 135 per Metric
Tonne for hard wood were arrived at by an involved process which is indicated
in the report, which to us seems to be fair and reasonable. The Government
did not arrive at the rates of royalty in an arbitrary manner. It had appointed B
a Committee of experts which went into the question of fixation of rates of
royalty in great detail and after examining the different methods adopted/
accepted the 'regeneration' or 'replacement' cost of the wood as the reasonable
criteria for fixing the rates of royalty. The Government thereafter considered
. the report and accepted the same. It cannot be said that the method adopted
or the price determined was either arbitrary or unreasonable. To us, it seems C
· to be reasonable, fair, realistic and keeping in mind the requirement of the
wood for the future generations as well.

20. We cannot agree with the contention urged by some of the counsel
appearing for the appellants that since what is sold to the appellants is natural
growth (bamboo), the replacement cost should not be the criteria for fixing D
the rates of royalty. Not only can be the replacement cost be the criteria, but
the State can fix the price keeping in mind several other factors, like public
revenue, ecology and environment, availability of forest produce in future,
the need of other consumers and some other such relevant considerations.

21. Though the Committee had arrived at flat rates of royalty of Rs. E
284 and Rs. 135 per Metric Tonne for bamboo and hard wood.respectively
for the entire quinquennium period of 1980-85, the Committee suggested that
instead offixing the uniform flat rate for the entire quinquennium it is desirable
to fix royalty at a sliding rate with annual increases limited to the prevailing
interest rates starting from Rs. 210 per metric tonne for bamboo and Rs. 100/ p
- per metric tonne for hardwood for the base year 1980-81. The Government
could have fixed a higher royalty rates applicable for the entire period but
thought it is better to fix a lower rates in the beginn)ng and gradually increasing
it in the final year as by that time selling price of paper will also increase as
was noted by the general trend. We do not agree with the contention raised
by Shri Shanti Bhushan that the Government could not fix the sliding rates G
especially in view of the fact that the rates of royalty for the 1980-85 was
fixed for Rs. 284 per metric tonne for bamboo and Rs. 135 per metric tonne
for hardwood which was reduced to Rs. 210 per metric tonne for bamboo an9
Rs. 100 per metric tonne for hardwood for the base year 1980-81 with
· gradually increasing at the bank rates for the coming years. Since the rates H
338 SUPREME COURT REPORTS [2002] SUPP. 3 S.C.R.

A of royalty was reduced for the base year from the suggested price it shows
the fairness on the part of the State Government in dealing with the appellants.
This was done for the benefit of the appellants and perhaps at their instance.

22. For the reasons stated above, we do not find any infirmity in the
impugned judgment, accordingly, the appeals are dismissed. The interim order
B granted by the High Court, which was later on permitted to be continued by
this Court, stands vacated. The State Government is put at liberty to encash
the Bank Guarantee and recover the amount due to it from the appellants in
accordance with law. No orders as to costs.

N.J .. Appeals dismissed.

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