# OIL AND NATURAL GAS COMMISSION AND ANR v. ASSOCIATION OF NATURAL GAS CONSUMING INDUSTRIES OF GUJARAT AND 9 ORS., ETC. ETC

- **Citation:** [1990] 3 S.C.R. 157
- **Court:** Supreme Court of India
- **Decided:** 1990-05-04
- **Case number:** Civil Appeal Nos. 8530-40 of 1983
- **Bench:** S. Ranganathan, N.D. Ojha, J.S Verma
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/oil-and-natural-gas-commission-and-anr-v-association-of-natural-gas-consuming-10832
- **Pages:** 50

## Headnote

Constitution of India, 1950: Articles 14, 32 and 226-0GC-A
statl'.tory corporation-Whether State agency-'Public utility' concern
-Obliged to supply gas at reasonable rates-Price fixation-Interference by Court-Permissibility of.
Oil and Natural Gas Commission Act, 1959: Section 140NGC-Whether 'public utility' undertaking-Whether obliged to sup-
~ -
ply gas for consumption of public.
Words and Phrases: 'Public utility'-'Reasonab/eness of rates'
meaning of.
The appellant, Oil & Natural Gas Commission, is a statutory
corporation constituted by and under the Oil and Natural Gas CommisA
B
c
D
sion Act, 1959. In most of its oil fields situated in Gujarat, gas comes
E
out along with crude oil as "free gas".
The appellant had agreed to supply this iias to the Gujarat State
Electricity Board (GSEBl and the Gujarat State Fertiliser Corporation
(GSFC) at a price related to fuel oil price on the basis of thermal value
equivalence, without any reference to the cost of production of gas as
F
such. Public discontent over the alleged high price charged was expressed and eventually the dispute was referred to the sole arbitration of
.~ -
Dr. V.K.R.V. Rao who gave his award. Dr. Rao made the "cost plus"
method the basis of his award in preference to the basis of thermal
equivalence of alternate fuel (thermal equivalence basis).
In July 1967, the supply of gas to some of the industries in and
around Vadodara city was started, on the basis of individual annual
contracts. Aggrieved by the steady rise in the prices, the respondents--
Association of Natural Gas Consuming Industries and Others-moved
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the Bombay High Court in March 1979 by way of a writ petition. In the
petition it was, inter alia, prayed that the UNGC be directed (i) to
H.
157
158
SUPREME COURT REPORTS
[1990] 3 S.C.R.
A
continue to supply the gas to the respondents despite the contracts in
their favour having lapsed; (ii) to discuss and negotiate·a fair, reason-
'->(
able and just price for supply of gas; (iii) to stop charging discriminatory prices for the supply of gas to the respondents in comparison with
the price charged to public sector undertakings; and (iv) to restrict the
minimum guaranteed quantity of offtake.
·
B
The High Court passed an interim order directing the ONGC to
x
continue the supply of gas to the respondents, at the existing rate of
'
Rs.50~ per unit which was later raised by the Court to Rs.1000 per unit.
1'
The Hiizh Court held; (i) The Oil and Natural Gas Commisson is
a public Utility t:ndertaking and has a duty to supply gas to anyone who
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c
requires it so long as there is enough supply available; (ii) Price fixation
is gmerally a legislative function. But the Oil and Natural Gas Commission being a State instrumentality, is bound to act reasonably in the
matter of fixation of price; such price is bound to be determined by
following any one of the modalities suggested in the judgment of the
D
High Court; (iii) There was no discrimination by the Oil and Natural
Gas Commission between the public sector undertakings on the one
hand and the respondents' undertakings on the other in charging differential prices; and (iv) The clause regarding minimum guaranteed offtake was valid and enforceable.
E
Before this Court, the appellant primarily challenged the finding
"
of the High Court that the ONGC was a 'public utility undertaking'
which was bound to supply gas at the request of any member of the
public at large. The appellant also contested the correctness of the High
Court's conclusion that the price of gas must be determined on the basis
ol cost of production plus a reasonable return for the investment made.
F
The appellant submitted that (i) the prices under the contracts entered
into with the respondents had been determined on the basis of a well-
- J..,
known principle, viz .. the ruling prices for an alternate fuel. and this
could not be said to be either arbitrary or unreasonable particularly
when a large number of industries were willing to take the supp

## Text

_Characters 0–39,489 of 126,026. This is a partial read: ask again with offset=39489 for what follows._

OIL AND NATURAL GAS COMMISSION AND ANR.
v.
ASSOCIATION OF NATURAL GAS CONSUMING INDUSTRIES OF GUJARAT AND 9 ORS., ETC. ETC.
MAY 4, 1990
[S. RANGANATHAN, N.D. OJHA AND J.S VERMA, JJ.]
Constitution of India, 1950: Articles 14, 32 and 226-0GC-A
statl'.tory corporation-Whether State agency-'Public utility' concern
-Obliged to supply gas at reasonable rates-Price fixation-Interference by Court-Permissibility of.
Oil and Natural Gas Commission Act, 1959: Section 140NGC-Whether 'public utility' undertaking-Whether obliged to sup-
~ -
ply gas for consumption of public.
Words and Phrases: 'Public utility'-'Reasonab/eness of rates'
meaning of.
The appellant, Oil & Natural Gas Commission, is a statutory
corporation constituted by and under the Oil and Natural Gas CommisA
B
c
D
sion Act, 1959. In most of its oil fields situated in Gujarat, gas comes
E
out along with crude oil as "free gas".
The appellant had agreed to supply this iias to the Gujarat State
Electricity Board (GSEBl and the Gujarat State Fertiliser Corporation
(GSFC) at a price related to fuel oil price on the basis of thermal value
equivalence, without any reference to the cost of production of gas as
F
such. Public discontent over the alleged high price charged was expressed and eventually the dispute was referred to the sole arbitration of
.~ -
Dr. V.K.R.V. Rao who gave his award. Dr. Rao made the "cost plus"
method the basis of his award in preference to the basis of thermal
equivalence of alternate fuel (thermal equivalence basis).
In July 1967, the supply of gas to some of the industries in and
around Vadodara city was started, on the basis of individual annual
contracts. Aggrieved by the steady rise in the prices, the respondents--
Association of Natural Gas Consuming Industries and Others-moved
G
the Bombay High Court in March 1979 by way of a writ petition. In the
petition it was, inter alia, prayed that the UNGC be directed (i) to
H.
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158
SUPREME COURT REPORTS
[1990] 3 S.C.R.
A
continue to supply the gas to the respondents despite the contracts in
their favour having lapsed; (ii) to discuss and negotiate·a fair, reason-
'->(
able and just price for supply of gas; (iii) to stop charging discriminatory prices for the supply of gas to the respondents in comparison with
the price charged to public sector undertakings; and (iv) to restrict the
minimum guaranteed quantity of offtake.
·
B
The High Court passed an interim order directing the ONGC to
x
continue the supply of gas to the respondents, at the existing rate of
'
Rs.50~ per unit which was later raised by the Court to Rs.1000 per unit.
1'
The Hiizh Court held; (i) The Oil and Natural Gas Commisson is
a public Utility t:ndertaking and has a duty to supply gas to anyone who
--
c
requires it so long as there is enough supply available; (ii) Price fixation
is gmerally a legislative function. But the Oil and Natural Gas Commission being a State instrumentality, is bound to act reasonably in the
matter of fixation of price; such price is bound to be determined by
following any one of the modalities suggested in the judgment of the
D
High Court; (iii) There was no discrimination by the Oil and Natural
Gas Commission between the public sector undertakings on the one
hand and the respondents' undertakings on the other in charging differential prices; and (iv) The clause regarding minimum guaranteed offtake was valid and enforceable.
E
Before this Court, the appellant primarily challenged the finding
"
of the High Court that the ONGC was a 'public utility undertaking'
which was bound to supply gas at the request of any member of the
public at large. The appellant also contested the correctness of the High
Court's conclusion that the price of gas must be determined on the basis
ol cost of production plus a reasonable return for the investment made.
F
The appellant submitted that (i) the prices under the contracts entered
into with the respondents had been determined on the basis of a well-
- J..,
known principle, viz .. the ruling prices for an alternate fuel. and this
could not be said to be either arbitrary or unreasonable particularly
when a large number of industries were willing to take the supply of gas
at the prices fixed on that basis; (ii) while public sector units and State
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instrumentalities ought not to be allowed to exploit the consumers. it
was equally necessary to. ensure that such units and instrumentalities
were enabled to make reasonable profits; (iii) in the context of the
integrated activity of production of crude oil and gas, it was almost
impossible to work out the cost in respect of any particular area or of a
particular bye-product; (iv) the cost plus basis was fixed by the Award
H seHral years ago and that too in the context of supply to certain State
0.N.G.C. v. ASSOCIATION
159
undertakings which, in turn, supplied essential commodities like electricity and fertilizers; and (v) the onus of showing that the prices charged
were unreasonable or arbitrary was on the respondents and they had
done nothing to discharge this onus.
On behalf of the respondents it was contended that a public utility
undertaking could not arbitrarily discontinue its supply or services
merely because the customer was unwilling to pay the price asked for as
unconscionable and unreasonable. It was further contended that the
price fixed must be reasonable and fair so as to give the undertaking a
reasonable return on the capital employed and that there could not be
any discrimination against industrial consumers, According to the
respondents, this was the only reasonable way of price fixation and
referred to the Award in support of this proposition. The respondents
further urged that to allow Oil and Natural Gas Commission to sell gas at
a higher price than this merely because. otherwise, but for the availability of gas. the consumers would have to spend more for their sources of
energy, will really amount to introduction an irrelevant element in the
process of price fixation and result in allowing the Oil and Natural Gas
Commission to make unreasonable profits at the expense of unhappy
consumers. It was argued that these principles were applicable with
greater force in the context of the constitutional discipline over. state
instrumentalities under Article 38 & 39 of the Constitution.
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Bolt v. Stennell CJ E.R.-Revised-p.1572; Al/null v. Inglis CIV
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E.R.-Revised-p. 206; Ira Y. Munn v. Peovle, 24 L.Ed. 77: United
Fuel Gas Co. v. Railroad Commission, 73L. Ed. 390; Los Angeles Gas
& Electric Corporation v. Railroad Commission. 77 L.Ed. 1180; Leo
Nabbia v. People, 78 L.Ed. 940; Harold E. West v. Chesapeake &
Potomac Telephone Com., 79 L.Ed. 1640; Federal Power Commission
v. Hope Natural Gas Co., 88 L.Ed. 333; Premier Automobiles v. Union,
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[1972] 2 S.C.R. 526; Panipat Cooperative Sugar Mills v. Union, [1973]
2 S.C.R. 860; Shree Meenakshi Mills v. Union, [1974] 2 S.C.R. 398;
Saraswati Industrial Syndicate v. Union, [1975] 1 S.C.R. 956; Prag Ice
and Oil Mills v. Union, [1978] 3 S.C.R. 293; Union of India v.
Cynamide India Ltd,, [1987] 2 S.C.C. 720, relied upon.
Allowing the appeals and upholding the prices charged by the Oil
and Natural Gas Commission, this Court,
HELD: (1) The Oil and Natural Gas Commission does not satisfy
the primary conditions for being a public utility undertaking as it has not
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so far held itself out or undertaken or been obliged by any law to
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SUPREME COURT REPORTS
[ 1990] 3 S.C.R.
provide gas supply to the public in general or to any particular crosssection of the public. The proviso to Section 14(1)(e) of the Act which
lays down that the setting up of industries to be run with the aid of gas
was not to be undertaken by the Oil and Natural Gas Conunission
without the Cent•al Government's approval also gives an indication
that the supply of gas to various industries on a general basis was not in
the immediate contemplation of the Act but was envisaged as a future
expansion to be initiated with Central Government's approval. Perhaps
a stage in the developmental activities of the Oil and Natural Gas Commission will soon come when such an obligation could be inferred but,
at present, the Oil and Natural Gas Commission supplies gas only to
certain selected contractees. [ISIE-G)
(2) It is however not necessary in this case to express any final
opinion on the issue whether the ONGC was a public utility undertaking
except to say, prima facie, that it could not be placed on par with a
public utility undertaking. AU that the respondents wanted was a declaration that they were entitled fo' the supply of gas at a reasonable price.
It was sufficient, for disposing of this claim, to deal with this aspect of
the matter and the larger aspect of Oil and Natural Gas Conunission
beinll..!! __ public utility undertaking could be left out of account. [183E-F)
....... -~ -·
(3) The treatment of the Oil and Natural Gas Conunission as a
public utility undertaking for the supply of gas will raise innumerable
basic questions totally inconsistent with the present system of selective
supply which the respondents want to be continued. It will transpose
the area of controversy to a totally different and wider plane. The Court
would then be constrained to hold that the present system of supply was
inconsistent with public law and the constitutional requirements of a
public utility undertaking. [J83C-D)
( 4) The main activity of the Oil and Natural Gas Commission is
that of exploration and prospecting for petroleum and petroleum
products. So far as gas, which is a bye product, is concerned, the Oil
and Natural Gas Commission has not so far been able to voluntarily or
constrained statutorily to harness and utilise its production for consumption by the public. llSIH; 182A]
( 5) There is no doubt that Dr. Rao made the cost plus method the
basis of his award in preference to the basis of thermal equivalence of
alternate fuel (thermal equivalence basis). But, the cost plus basis Oxed
by Dr. Rao in the background of the real nature of the dispute before
H him three decades ago could not be taken as conclusive in the present
-.(
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-f
~
_.,
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' )..
O.N.G.C. v. ASSOCIATION
161
situation. Dr. Rao was concerned primarily with an issue raised by the
public of Gujarat as against the Oil and Natural Gas Commission. He
was really adjudicating upon the price which the Oil and Natural Gas
Commission should charge to public sector undertakings catering to the
essential needs of the State. In that context, his objective was, understandably, to fix the price as low as possible. The consumer under
consideration by him represented the public need of the State of
Gujarat and, as against such public interest, the Oil and Natural Gas Commission's profit requirements paled into insignificance. [189C; G; D-E]
(6) Here, the Court is dealing with a price to be fixed under a
contract between the Oil and Natural Gas Commission and one set of
industries in the State who wish to make a change over from the furn·
ance oil system to that of gas supply with a view to increase their own
profitability and gain an advantage, if possible, over other industries in
the State. In this context, Oil and Natural Gas Commission is entitled to
a larger latitude and charge a price which the market can bear. The
only restriction is that, being a State instrumentality, it should not be a
whimsical or capricious price but should be one based on relevant considerations and on some recognised basis. [ 189H; 190AJ
(7) Cost plus is not a satisfactory basis in all situations. May be
the cost plus is an ideal basis where the commodity supplied is the
product of a monopoly vital to human needs. In that context the price
fixed should be mumimum possible as the customer or consumer must
have the commodity for his survivial and cannot afford more than the
minimum. Per Conti"' there can be situations where the need of the
consumer is not so vital and the requirements of the economic scene are
such that the needs of the producer should be given greater consideration. In such situations, the "plus" element in the cost plus basis
(namely, the allowable profit margin) should not be confmed to "a
reasmmble return on the capital'" but should be allowed to have a much
"larger content depending on the circumstances. Given a favourable
area of operation, commercial profits need not be either anathema or
forbidden fruit even to public sector enterprises. [191D-E; G-H]
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Anakapallee Case, [1973] 2 S.C.R. 882; Venkatachalam v. DeG
puty Transport Commissioner, [1977] 2 S.C.R. 392, referred to.
(8) It would not be right to insist that the Oil and Natural Gas
Commission should fix oil prices only on cost plus basis. Indeed, its
policy of pricing should be based on the several factors peculiar to the
industries and its current situation. and so long as such a policy is not
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SUPREME COURT REPORTS
[ 1990) 3 S.C.R.
irrational or whimsical, the court may not interfere. [195D)
(9) Price fixation is generally a legislative function. But Parliament generally provides for interference only at a stage where in
pursuance of social and economic objectives or to discharge duties
under the Directive Principles of State Policy, control has to be exercised over the distribution and consumption of the material resources
of the community. [195F]
Mis. Shri Sitaram Sugar Company Ltd. & Anr. v. Union, J.T.
1990 (1) S.C. 452; Jagadamba Paper Industries v. Haryana State Electricity Board, [1984) l S.C.R. 165; Kerala State Electricity Board etc. v.
Mis. S.N. Govinda Prabhu & Bros. & Ors. etc., [1986) 4 S.C.C. 1968,
referred to.
(10) It cannot he said that the Oil and Natural Gas Commission
has acted arbitrarily in fixing the prices on the thermal equivalence
basis; the fact that it has not done it on cost plus basis does not vitiate
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the price fixation. The only question to he considered is as to whether
the Oil and Natural Gas Commission has fixed a price based on relevant
materials and on some known principle. l200C]
(ll) The manufacture, distribution and consumption of gas has
yet not attained the status of an essential commodity till recently. At
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present, the industry is in the penumbra( region where the commodity is
free to be distributed at the manufacturer's choice, but yet where such
manufacturer beinJ? a State instrumentality, has to conform to Articles
14 and 19 of the Constitution. At this stage of development of the
industry a much wider latitude is permissible in the fixation of prices
than the imposition of a "no profit, no loss" basis or a "cost plus" basis
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on the producer. f200E-G)
(12) It is now well settled that a favourable treatment of public
sector organisations, particularly ones dealing in essential commodities
or service, would not he discriminatory. No tangible material has been
brought to the Court's notice which would support the plea of unfair
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discrimination. [203E-F)
( 13) 1be High Court rightly npheld the Oil and Natural Gas
Commission's right to insist on a munimum offtake guarantee. [202G)
Amalgamated Electricity Co. Ltd. v. Jalgaon Borough MuniciH
pality, [1976] 1S.C.R.636.
.Y
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0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.J
163
CIVIL APPELLATE JURISDICTION: Civil Appeal Nos.
8530-40 of 1983.
Appeals by Certificate from the Judgment and Decree dated
30.7 .1983 of the Gujarat High Court in Special Civil Applicatior. Nos.
883 of 1979, 913 of 1979, 1897 of 1981, 2316 of 1982, 2384 of 1982, 2445
A
of 1982, 2470 of 1982, 2977 of 1982, 4194 of 1982, 4520 of 1982 nnd 2542
B
of 1982.
K. Parasaran, Attorney General, 8. Sen, A.K. Ganguli, Dr.
Y.S. Chitley, T.S. 'Krishnamurthy Iyer, N. Nettar, G.S. Narayana,
P. Parameshwaran, T.V.S.N. Chari and N.N. Sharma for the Appellants.
Anil B. Diwan, K.J. Kazi, Dr. L.M. Singhvi, Ms. M. Arora, Mrs.
B. Chib, M. Singhvi, D.A. Dave, Mrs. M. Karanjawala, R.N. Karanjawala, Mr. P.H. Parekh, Mr. C.A. Cazi and Mrs. H.S. Anand for the
Respondents.
D .N. Misra for the Intervenor.
The Judgment of the Court was delivered by
RANGANATHAN, J. These are eleven appeals preferred by the
Oil and Natural Gas Commission (ONGC, for short) from a judgment
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and order, dated 30th July, 1983, of a Division Bench of the High
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Court of Gujarat at Ahmedabad in a batch of writ petitions, since
reported in 1983-24(2) Gujarat Law Reporter 1437. The appeals are
pursuant to a certificate of fitness granted by the High Court.
The ONGC was initially a Department of the Government of
India but, in view of its expanding activities in the search for strategic
F
and vital materials like oil, petroleum and its products it was set up as a
body corporate. It is now a statutory corporation constituted by and
under the Oil and Natural Gas Commission Act, (Central Act 43 of
1959, hereinafter referred to as 'the Act'). The Act provides for the
establishment of a Commission "for the development of petroleum
and petroleum products produced by it and for matters connected
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therewith". Section 2(f) of the Act defines 'petroleum' as having the
same meaning as in the Petroleum Act, 1934 (Act 30 of 1934) and as
including 'natural gas'. The Commission established under the Act
took over the previously existing organisatiOn with effect from 18. 9.59.
Some of the provisions of the Act which are relevant for our
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[1990) 3 S.C.R.
present purposes may be set out here. Chapter III which deals with the
powers and functions of the Commission consists of Sections 14 and
15. S. 14 reads thus:
"14. Functions of the Commission-
(1) Subject to the provisions of this Act, the functions of
the Commission shall generally be to plan, promote,
organise and implement programmes for the development
of petroleum resources and the production and sale of
petroleum and petroleum products produced by it and to
perform such functions as the Central Government may,
from time to time, assign to the Commission.
(2) In pamcular and without prejudice to the generality of
the foregoing provision, the Commission may take such
steps as it thinks fit-
(a) for the carrying out of geological and geophysical
surveys for exploration of petroleum;
xxx
xxx
xxx
( e) for the transport and disposal of natural gas and refinery gases produced by the Commission:
Provided that no industry, which will use any of these
gases as a raw material, shall be set up by the Commission
without the previous approval of the Central Government.
xxx
xxx
xxx
(h) to perform any other function which is supplemental,
--'..
incidental or consequential to any of the functions
aforesaid or which may be prescribed."
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Section 15 empowers the Commission to exercise all such powers as
may be necessary or expedient for the purpose of carrying out its
' functions under the Act. Such powers include the disposal of any property, right or privilege, the original or book value of which exceeds
such amount as may be prescribed, or where no such amount bas been
>
prescribed, exceeds ten lakbs of rupees and this power could be exerH
cised after obtaining the previous approval of the Central Government
O.N.G.C. v. ASSOCIATION [RANGANATHAN, J.[
165
[Clause (c)J. Chapter IV of the Act deals with finance, accounts, audit
and reports. Sections 16 and 17 deal with the capital of the Commission and the vesting, in the Commission, of the previous set up in this
regard. Section 23 of the Act requires the Commission to furnish to the
Central Government such returns and statements and such particulars
in regard to any proposed or existing programme for the development
of petroleum resources and the production and sale of petroleum and
petro!eu!!! products produced by the Commission as the Central
Government may, from time to time, require. Section 24 in ChapterV
(Miscellaneous) enacts that any land required by the Commission for
carrying out its function under the Act shall be deemed to be needed
for a public purpose and such land can be acquired by the Commission
under the provisions of the Land Acquisition Act, 1894. S. 31 confers
rule making powers on the Central Government, in pursuance of
which have been framed the Oil and Natural Gas Commission Rules,
1960. The only rule relevant for our present purposes is rule 25, dealing with contracts. It reads as follows:
"25. Contracts:
(1) The Commission may enter into contracts for the
purpose of performing its functions under this Act;
Provided that provision therefor exists in the budget
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approved by the Government.
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(2) Contracts made on behalf of the Commission shall not
be binding on it unless they are executed by a: person duly
authorised by it.
(3) A person authorised by the Commission to enter into
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any contract on its behalf shall not be personally liable for
any assurance or contract made on its behalf and any liability arising out of such assurance or contract shall be dis ..
charged from the Fund."
The statute, it may be observed, neither imposes a specific duty on the
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O.N.G.C. to supply its products to consumers at large nor contains
any provisions regarding the fixation of prices for the commodities
made available by the O.N.G.C. for sale.
In the course of its drilling and exploration of oil, the ONGC
discovered oil-bearing fields in Cambay and Ankleswar region in 1969
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[1990] 3 S.C.R.
and 1961 respectively. In most of the oil fields situated in Gujarat, gas
comes out along with crude oil and is commonly known as "associated
gas". In Caml!ay area, gas is unaccompanied by crude oil and is known
as ''free gas". This is easily combustible and can be used as domestic as
well as industrial fuel. We are concerned here with both these commodities which are generally known as 'natural gas' and we shall refer
to them compendiously as 'gas'.
In October, 1961 ONGC first thought of the idea of using natural
gas in addition to fuel oil in industries. It had detailed discussions with
the Gujarat State Electricity Board (GSEB) and it was agreed between
them that gas should be supplied to the GSEB at a price related to fuel
oil price on the basis of thermal value equivalence. On this basis, an
agreement was entered into between them in March, 1963 whereunder
the price of fuel oil was fixed at Rs. 77 .26 per tonne including rail
frieght; and, based on this price and thermal value equivalence, the
price of Cambay gas was fixed at Rs.80.14 per 1000 cubic metres
(hereinafter referred to as 'the Unit') and of Ankleshwar gas at
Rs.106.66 per unit, rounded off to Rs.80 and Rs.100 per unit respectively. The ONGC began to supply gas from Cambay region ofDhruvan Power Station in 1964 and from Ankleshwar to Uttaran Power
Station in 1965. The ONGC also entered into discussions with the
Gujarat State Fertilizer Corporation (GSFC) and ultimately it was
agreed, on the footing of the price of Rs. 76 per tonne in respect of
Koyali Naphtha, that associated gas should be supplied to the GSFC at
between Rs.88 and Rs.90 per unit on the principle of thermal equivalence. This was in 1966. It may be mentioned here that the three
parties concerned viz. the ONGC, GSEB and GSFC, had more or less
agreed to the principle of determining the price of gas on the basis of
thermal equivalence with an alternative fuel or feedstock emanating
from the processing of crude oil. There was no reference to the cost of
production of gas as such.
Despite the above agreements, however, the concerned parties
were not all very happy. The GSFC resented the fact that discount was
not given to them as bulk purchasers and that the prices charged for
the Trombay fertiliser factory and power house at Bombay were substantially lower than the prices that the ONGC charged them. Eventually, public discontent was expressed over the alleged high price that
was being charged for gas by the ONGC to these organisations. It was
felt that the ONGC was denying to them the advantage they should
have obtained by the discovery of gas in the region of their operation.
It was also felt that this treatment resulted in discrimination against
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O.N.G.C. v. ASSOCIATION {RANGANATHAN, J.]
167
them in comparison with advantages enjoyed by other States due to
the availability of fuel resources such as coal or hydro-power within
their areas. In view of these expressions of public feeling, the question
of fixing a proper price for the gas was taken up by the Government of
·Gujarat with the Government of India. Eventually, as no agreement
could be arrived at, the disputes was referred to the sole arbitration of
Dr. V.K.R.V. Rao who gave his award (hereinafter referred to as 'the
award') on 23.9.1967. He determined the price of natural gas at Rs.50
per unit ex-well-head, to which were added royalty, sales-tax, depreciation and the transport charges. This award was to be enforced for a
)-· period of five years i.e. upto 31.3.1971. Between April 1971 and
December 1975, the well-head price was increased and fixed at Rs.66
per unit, we are all told, on the intervention of the then Gujarat
Governor. These prices were revised subsequently. The supply to
GSEB was revised to Rs.155 and the rate of supply to GSFC was
revised to Rs.320 per unit.
At that time, there were very few industries set up in and around
Vadodara and these depended, besides electricity, on other forms of
energy generated through coal or fumance oil. In July 1%7, the supply
of gas to some of these industries in and around Vadodara city was
started, initially as a temporary measure pending the effective
materialisation of the Gujarat Fertilizer Corporation demand, after
which the industries were to go over to fuel oil if gas could no longer be
supplied. After a series of discussions, the Federation of Gujarat Mills
and Industries agreed to a price of Rs.100 per unit of Ankleswar gas
for this supply. The charging of ten rupees less per unit supplied to the
Fertiliser Corporation was justified on the ground that such differentiation was consistent with general practice where a petroleum feed
stock is used for chemical industry. Among the industries that thus
received gas supply were the ten respondents (respondents 2 to 10 in
these appeals) who have formed themselves, in September, 1978, into
an association called "The Association of Natural Gas Consuming
Industries of Gujarat", which is respondent No. 1. The supply to these
industries-extended later to a few more-was based on individual
contracts entered into with each one of the concerns. Initially, the
ONGC entered into contracts valid for a period of five years at a time
but, subsequently-it is said, due to a fear of possible shortage in the
availability of enough gas-this was changed and the contracts were,
generally, made annual, except in regard to certain public sector
undertakings and, it is said, a few companies. The rates of supply were
also slowly stepped up as can be seen from the following table:
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A
B
c
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SUPREME COURT REPORTS
[ 1990] 3 S.C.R.
Period
Price of supply
1.1.1976 to 31.03.1976
Rs.322.63.
1.4.1976 to 31.12.1976
Rs.341.45
1.1.1977 to 31.03.1977
Rs.351.00
1.4.1977 to 31.12.1977
Rs.371.16
1.1.1978 to 31.03.1978
Rs.382.15
1.4.1978 to 31.03.1979
Rs.504.00
According to the ONGC, the price demanded from these
industries and initially been based on alternative fuel cost i.e., the cost.
which these industries would have had to pay for fuel oil if no supply of
gas had been available. Later, upto December 1975, the price was
based on the cost of production, as determined by the award. After the
expiry of the period of operation of the award, the basis for calculation
of price was revised on the basis of the thermal equivalence of coal
price. The rates of supply from 1.4. 78 as fixed above from time to time
were also made subject to an automatic annual escalation at 5%. The
D
contracts, as already mentioned, were annual and contained no term
for renewal. On the expiry of each contract, a fresh contract had to be
entered into and, naturally, the new contract stipulated prices for supply that were prevalent at the time of the respective contracts. It may
be mentioned that the existing contracts with the various consumers
E
had lapsed by efflux of time on 31.3.79 in some cases, 30.1.80 in some
other cases and in 1982 in respect of others.
Aggrieved by the steady rise in the prices, writ petition No. 883
of 1979 was filed by the respondents in the Bombay High Court in
March 1979. In this writ petition it was prayed that the ONGC should
be directed (a) to continue to supply the gas to them despite the
F
contracts in their favour having lapsed; (b) to supply the break-up and
the data on the basis of which the price structure was arrived at and to
fix the price after giving reasonable opportunity to the concerned
industries or their associations; (c) to discuss and negotiate a fair,
reasonable and just price for supply of gas; (d) to restrict the minimum
guaranteed quantity of offtake to 75 per cent of the contracted
G
quantity (this was because the ONGC had been insisting on raising the
said guarantee to 90 per cent) and; (e) to stop charging discriminatory
prices for the supply to the respondents in comparison with the price
charged to public sector undertakings. Pending the hearing and final
disposal of the petition, an interim order was sought restraining the
ONGC from discontinuing the supply of gas to the petitioners on such
H
terms as the Court may think fit and proper.
7
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0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.]
169
On 30.3.1979, the Court passed an interim order permitting the
A
petitioners to continue to pay "on the same terms as at p~esent" Le. at
Rs.504 in some cases and a slightly different figure in other cases.
Subsequently, however, with the passage of time the price of gas was
stepped up by the ONGC in the following manner:
Period
Amount
1.4.1981to31.12.1981
Rs. 741.00
~-
1. 1. 1982 to 31. 12. 1982
Rs.2095.70
.... 1.1.1983
Rs.2403.03
15.2.1983
Rs.2503.03
17.3.1985
Rs.2878.00
We are told that the sudden jump in prices w.e.f. 1.1.1982 was consequent on the decision of the ONGC to change the basis of fixation of
price, once again, to furnace oil equivalence. In view of this increase in
~ · the prices demanded by it from other parties, who according to the
ONGC were willing to pay the price asked for, an application was
made to vacate or modify the interim order dated 30.3.1979. On
5.11.1982, the Division Bench of the High Court, after pointing out
the various difficulties and questions raised by the case thought it
would be fit and proper to direct the ONGC not to discontinue the
supply of gas but to continue to supply it at the rate of Rs.1,000 per
unit till November 30, 1983 (unless the petition was disposed of in the
meanwhile), subject to adjustment being made in case this Court or
the machinery evolved at the time of final disposal of the petition
determined the price of gas at a different rate. ·In other words, if,
ultimately, the price of gas should be determined at a higher rate, the
writ petitioners would be obliged to make good the difference. In case
a lower rate should be determined, the ONGC would be obliged to
r6fund the excess amount collected or adjust it against future supplies,
as the Court may direct at the time of disposing of the matter finally. A
similar order was passed Qn 29.12.1982 in another batch of cases.
When these appeals were filed a Bench of this Court, on 6.10.1983,
continued the interim price of Rs.1,000 per.unit without prejudice to
the rights and contentions of the parties and directed the appeals to be
expedited.
It has taken six years since then for these petitions to come up for
.hearing and till now the respondents have continued.to pay at the rate
of Rs.1,000 per unit. It has been stated before us that some of the
respondents have failed to.pay even at the rate of Rs.1,000 as directed
B
c
D
E
F
G
H
A
B
c
D
E
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SUPREME COURT REPORTS
[1990] 3 S.C.R.
by this Court and that this Court had to direct, by its orders dated
15.4.87 and 30.10.87, that the respondents "will not charge, encumber
or alienate, except with the leave of this Court, any of their immovable
assets included in the respective undertakings and that they will make
their immovable assets available for discharging the respective liabilities on account of the difference in the price of (all) the gas supplied to
them (and) further during the pendency of the appeals as determined
by the orders made by the Court while disposing of the appeals."
In order to complete the narration of relevant facts, it may be
mentioned here that, though natural gas, being a "petroleum product"
falls within the scope of the Essential Commodities Act and though
control orders have been issued under the said Act regulating the
supply and distribution of several petroleum products, it is only by an
order dated 30.1.1987 that the price of gas has been fixed by the
Government at Rs.1400 per unit which, together with taxes, comes to
about Rs.1848 per unit. It may also be mentioned that, while on the
one hand the said fixation of price has been challenged by the petitioners and certain other industries before the Gujarat High Court, the
Government, on the other hand, is in the process of revising .the
prices, perhaps to a higher figure, in consultation with the Bureau of
Industrial Costs and Prices. In the petitions which are pending before
the Gujarat High Court an interim price of Rs.1,000 has been fixed
following the orders in the matters now before us. The result is that,
ever since January 1983 and till today, most of the petitioners have
been paying for the gas supplied only at the rate of Rs.1,000 per unit
and some of the industries have defaulted even in doing this.
A prayer was made by the Union of India to transfer to this
Court the writ petition subsequently filed challenging the price fixation
F
of 30.1.87 but this request was declined on 4th August, 1988. This
court observed that, after these appeals are disposed of, the High
Court can proceed to dispose of the said writ petitions in accordance
with the judgment. The position, therefore, is that we are not concerned in these appeals with the period beyond 30.1.1987 when the
jurisdiction to fix prices came to be vested in the Central Government.
G
We are concerned in these matters only with the period from the date
of expiry of the contracts in favour of each of the respondents to
30.1.1987 and with the following questions: (a) whether the O.N.G.C.
is at liberty to fix its own price for the gas or should be directed to fix
the price in any particular manner; (b) whether the O.N.G.C. can be
directed to supply data and the break-up for the price charged and to
H negotiate the price with the parties concerned; (c) whether the
,l .
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0.N.G.C. v. ASSOCIATION [RANGANATHAN, J.]
171
0.N.G.C. can be compelled to continue to supply gas to the various
petitioners at the interim prices fixed by the court subject to adjustment on fixation of prices determined in accordance with the directions of the court; and (d) whether the minimum guarantee of off-take
could be raised by the O.N .G.C. to 90 per cent instead of75 per cent.
A
It is unnecessary at this stage to set out the various contentions
B
raised by the parties before the High Court as they will have to be
discussed in some detail later. Here it may be suffici£nt to summarise
the effect of the High Court's judgment in disposing of these writ
petitions. The High Court held:
(i) The 0 .N .G .C. is a public utility undertaking and has a
duty to supply gas to anyone who requires it so long as there is
enough supply available;
(ii) Price fixation is generally a legislative function. But
the O.N.G.C., being a State instrumentality, is bound to act
c
reasonably in the matter of fixation of price; such price is bound
D
to be determined by following any one of the modalities suggested in the judgment of the High Court;
(iii) There was no discrimination by the 0.N.G.C.
between the public sector undertakings on the one hand and the
respondents' undertakings on the other in charging differential
prices;
(iv) The clause regarding minimum guarantee was valid
and enforceable.
E
However, in view of its finding that the ONGC is a public utility
F
"~ undertaking, the Court took the view that it should supply gas to the
respondents subject to the availability of gas supply and also that such
supply should be made at a price which was to be determined in one of
the four different methods set out in paragraph 36 of the judgment. It
was also observed by the Court that, the respondents were agreeable
to price fixation by anyone of three of the said methods. The concludG
ing portion of the judgment, reads thus:
: ;..
"36. Now we come to the last part of this judgment. It is
regarding what relief should be granted in this group of
petitions. We have already said above that the action of the
ONGC in charging the rate in the respective cases is
H
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SUPREME COURT REPORTS
[1990] 3 S.C.R.
ex-f~ unreasonable and to that extent their demand for -('
the said price is set.aside. The ONGC however, shall be at
liberty to get the price for that period and subsequent
period fixed according to the reasonable and rational
norms and for that purpose it is open to the ONGC to
follow any one of the following three courses:
_., .. '
.
(i) They may request the Central Government to appoint a
';":
Commission for the purpose of deciding the prices of gas 4
from time to time, including the time for which we have set
aside their demand of price, invoking the provisions of the
Commission of Inquiry Act or any other law;
(ii) They may invoke the arbitration of some eminent
economist in consultation with the petitioners; or
(iii) They may themselves decic;le the price, after bringing
to their consideration all relevant factors and for that
purpose they may hear fully and effectively the petitioners
and other persons likely to be affected thereby:
If the last of the above three courses is adopted by the
ONGC for deciding the price structure afresh, it would be
in their interest to give hearing to the persons likely to be
affected so that the possibility of a new round of litigation is
avoided. We reiterate that as far as the petitioners are concerned, they are amenable to any of the three modes which
the ONGC may choose to adopt.
"37. We accordingly set aside the prices demanded by the
-ONGC from these petitioners in this group of petitions,
leaving it open to the ONGC to deal with the question of
price fixation in any one of t!ie three modes suggested by
us. The petitions are accordingly partly allowed. Rule is
accordingly made absolute in all these petitions with costs.
38. The civil applications, in view of the final decision, do
not survive and stand disposed of and till the new price
fixation is had, the price charged last from these petitioners
under the respective contracts with them shall continue to
9perate between the parties, subject to adjustments in
future after prices are fixed as stated above."
--<.
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O.N.G.C. v. ASSOCIATION [RANGANAIBAN, J.]
173
Shri B. Sen, who appeared for the ONGC, made it clear at the
A
outset that he was not disputing the propositions (a) that the ONGC is
'State' within the meaning of Article 12 of the Constitution; and (b)
that it has a duty to act reasonably and fairly so as not to infringe the
provisions of Articles 14 and 19 and also in consonance with the directive principles of State policy set out, inter alia, in Articles 38 and 39 (b)
of the Constitution.