Supreme Court rules Indian Railways is not a deemed distribution licensee, must pay cross-subsidy surcharge
A bench of Justices Dipankar Datta and Satish Chandra Sharma upheld APTEL's view that Indian Railways procures electricity for its own use and is therefore a consumer liable to pay cross-subsidy and additional surcharges under the Electricity Act.
The Supreme Court on Thursday ended a decade-long dispute between Indian Railways and a clutch of State distribution companies, holding that the Railways does not qualify as a deemed distribution licensee under the third proviso to Section 14 of the Electricity Act, 2003 and must pay cross-subsidy and additional surcharges when it procures power through open access. A bench of Justices Dipankar Datta and Satish Chandra Sharma dismissed all eight statutory appeals against the 12 February 2024 ruling of the Appellate Tribunal for Electricity, leaving APTEL's findings undisturbed.
The case
The proceedings began in 2015 when Indian Railways sought connectivity from MSETCL to procure 100 MW from Gujarat Urja Vikas Nigam for sixteen traction substations on the Central and Western Railways through inter-state open access. MSETCL refused, asking the Railways to first establish its status as a deemed distribution licensee before the Central Electricity Regulatory Commission. The CERC, by an order of 5 November 2015, sided with the Railways and held it to be a deemed licensee, relying on a Ministry of Power letter of 6 May 2014 and the older judgment in General Manager, Northern Railways v. Chairman, UPSEB.
Five State commissions disagreed. On appeals across the country, PSERC, OERC, MPERC, RERC and HERC each held that the Railways was not a deemed licensee. APTEL took up eight appeals together and, on 12 February 2024, ruled against the Railways. The Tribunal held that the Railways did not satisfy the functional test of a distribution licensee — it neither operated a distribution system within Section 2(19) of the Act nor supplied electricity to consumers within Section 2(15). Locomotives, signal equipment and station facilities, the Tribunal reasoned, are constituents of the Railways itself, not external consumers.
What the Court held on the deemed licensee question
Senior Advocate M.G. Ramachandran, for the Railways, argued that Section 11 of the Railways Act, 1989 carries a non-obstante clause that authorises the Railways to lay down a complete electrical system, including transmission and distribution. Section 173 of the Electricity Act, he said, settles any inconsistency in favour of the Railways Act. The Railways was, in any event, an “Appropriate Government” under Section 2(5) of the Electricity Act, exempted from licensing under the third proviso to Section 14.
The bench accepted that the Railways could be regarded as falling within “Appropriate Government” for the limited purpose of analysis. It refused to read more into that classification. Nominal status, the Court held, cannot substitute for the substantive functions a distribution licensee must perform. A distribution licensee — whether actual or deemed — must operate a distribution system and supply electricity to consumers within an area of supply. The Railways does neither. It procures power for its own consumption and conveys it within an internal network to its locomotives and stations, none of which are consumers within the statute's meaning.
The Ministry of Power's clarificatory letter of 6 May 2014 was an administrative directive under Section 107 of the Electricity Act, the Court observed, and is not mandatory in nature. It cannot rewrite the statutory test.
The functional test from Sesa Sterlite
The bench drew heavily on its earlier decision in Sesa Sterlite Ltd. v. Orissa Electricity Regulatory Commission, which adopted a functionality test. Sesa Sterlite held that an entity which has been accorded the status of a deemed licensee, but which uses the entire quantum of electricity for its own consumption and has no customers, is not in fact a distribution licensee under the Act and is itself a consumer.
Applied to the Railways, the test produces a clean result. The Railways purchases electricity exclusively for its own use and supplies it to no one but its own constituents. In arguendo, the bench observed, even if the Railways were treated as a deemed licensee, its procurement of electricity through open access exclusively for its own consumption would render it a consumer for that purpose — and therefore liable to pay the surcharges.
The reasoning on cross-subsidy and additional surcharge
Section 42 of the Electricity Act mandates distribution licensees to develop and maintain efficient distribution systems and to supply electricity to any consumer who demands it. Section 42(2) levies a Cross-Subsidy Surcharge to meet the requirements of cross-subsidy within the area of supply, and Section 42(4) levies an Additional Surcharge to meet the fixed costs of the licensee arising from its obligation to supply.
The bench underlined the policy logic. Distribution licensees supply electricity at concessional tariffs to agricultural users and low-income households as a matter of social policy. When high-volume consumers like the Railways exit through open access, distribution licensees are left with stranded costs and depleted cross-subsidy capacity. The surcharges exist to spread that loss equitably rather than dump it on the residual consumer base.
To exempt the Railways from these surcharges, the Court held, would be to let it claim privileged treatment as a licensee while behaving as a consumer — an outcome the statute does not permit.
The legislative-history move
The bench's most striking reasoning is its use of the Draft Electricity (Amendment) Bill, 2025 as an interpretive aid. The proposed amendment, the Court noted, seeks to add a proviso under Section 61(g) eliminating the cross-subsidy and additional surcharges for the Railways, Metro Railways and manufacturing enterprises within five years. The Explanatory Note to the Bill explicitly states that the existing tariff regime “currently burdens” these entities with cross-subsidies and surcharges.
This, the Court observed, is the legislature itself acknowledging that the existing statutory framework does impose those obligations on the Railways — otherwise the proposed exemption would be unnecessary. Drawing on Vodafone International Holdings v. Union of India, the bench held that a legislative proposal introducing a specific exemption is indicative that such exemption was not covered by the existing framework. The Court refused to read the proposed exemption into the current Act through purposive construction. A casus omissus, the bench reiterated, cannot be supplied by the judicial interpretive process.
The Railways, being a Central Government entity, was also held bound by the principle of estoppel — it could not advance contentions before the Court contrary to the position taken by the Government in its own legislative proposals.
Order
All eight Civil Appeals were dismissed and APTEL's common judgment of 12 February 2024 upheld. The respondents — the State distribution companies — have been directed to compute and issue detailed calculations of the Cross-Subsidy Surcharge and Additional Surcharge amounts outstanding against the Railways, disaggregated by area of supply and period of open access. The Railways will have a reasonable opportunity to respond, with any disputes going to the Appropriate Commission. There will be no order as to costs.