India's top court gives diesel vehicles reprieve in Delhi

India's Supreme Court handed a reprieve to the auto industry on Friday, ruling that new diesel vehicles can be allowed on the streets of the national capital as long as a 1 percent "green" tax is paid.

The news was welcomed by the auto industry after a series of lower court rulings banned diesel vehicles, both new and old, on concerns that their exhaust fumes were contributing to Delhi's deepening air pollution crisis.

The Supreme Court allowed the registration of large diesel vehicles with an engine capacity of 2 litres or more in Delhi and the surrounding National Capital Region (NCR), according to Harish Salve, a lawyer connected to the case.

The green levy will be imposed on the retail price of each vehicle, excluding tax and other costs.

India's highest court will decide later on whether to impose the tax, called a green cess, on diesel vehicles with smaller engines, Salve added.

The court imposed a temporary ban last year on the sale of large diesel cars in Delhi and said it was considering an additional tax, threatening sales of car makers such as Toyota Motor Corp and Tata Motors.

"We are happy that the ban has been lifted," an official from Society of Indian Automobile Manufacturers told Reuters.

"There are certain companies which were very badly impacted and they will now be able to sell their vehicles and equip their market in the NCR region, and it's good for the industry."

Mercedes-Benz India also welcomed the Supreme Court decision.

Shares of Tata Motors ended up 2.7 percent, while Mahindra & Mahindra advanced 2.1 percent. Maruti Suzuki rose 0.4 percent.

Previous court-ordered restrictions on diesel vehicles, which experts say cause worse air pollution than other engine types, are often contradictory and poorly enforced in India.

In a recent ruling, India's top environmental court ordered the authorities to remove all diesel vehicles over 10 years old from the capital's streets.

Delhi is among the world's most polluted cities and environmentalists have urged the government to tackle the problem.

"It is a regressive step and unfortunate that the central government could not defend the public cause," Vivek Chattopadhyaya, programme manager, Air Pollution Control, Centre for Science and Environment told Reuters after Friday's the court ruling.