Levy Of Water Usage Charges On Hydropower Projects Is Tax On Generation Of Electricity, Beyond State Legislature's Competence: J&K&L High Court

The Court struck down the impugned enactment to the extent it imposes water usage charges and restrained the State from imposing any tax on the generation of electricity under the garb of water usage charges or any other tax.

The Court was hearing a batch of three writ petitions filed by independent power producers operating river-based hydroelectric projects in the Union Territory of Jammu and Kashmir, challenging the provisions of the Act of 2010 and the rules framed thereunder to the extent they levy water usage charges for generation of electricity, along with the demand notices issued pursuant thereto.

The petitions were heard by a Bench of Justice Rajnesh Oswal and Justice Sanjay Dhar, who observed,

“In fact, in the operation of hydropower projects, the utilization and non consumption of water constitutes an inextricable and indispensable facet of the generation process; consequently, any statutory levy, charge, or exaction imposed at any stage prior to or during the generation of power tantamounts, in substance and effect amounts to tax upon the generation of electricity itself.”

All the writ petitioners, to whom hydropower projects were allocated by the Government for generation of hydroelectricity, operate river-based power projects and use water for the purpose of generation of electricity.

In the year 2010, the Legislature of the erstwhile State enacted the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, and pursuant thereto the Rules of 2011 came to be framed. The provisions of the Act provided for levying of water usage charges, inter alia, on use of water for generation of electricity.

In exercise of powers under Sections 120, 130 and 145(1)(d) of the Act, the authorities issued demand notices against the petitioners in respect of water usage charges for generation of electricity from the year 2010 onwards.

The petitioners challenged the provisions of the Act on the ground that under the garb of water usage charges, the Government was levying a tax on generation of electricity, which was beyond the competence of the State Legislature.

It was contended that the use of water by hydro power projects is non-consumptive in nature, and that the fact that the Water Resources Regulatory Authority had fixed the water usage charges on the basis of head height from which water is deployed for propelling the turbine, and not on the basis of quantum of water used, showed that the respondents were in fact imposing a tax on generation of electricity.

It was further submitted that under the contracts executed between the petitioners and the Union Territory, the petitioners were obliged to provide 12% free electricity to the Government, which was in the form of royalty for use of water, and therefore they were estopped from being saddled with additional water usage charges. It was also contended that the levy was hit by the doctrine of promissory estoppel as the State Hydro Power Policy did not provide for any water usage charges or cess.

The Union of India took the stand that the power to levy taxes on generation of electricity was not vested in the State Legislature, and that under Entry 53 of List II, the States were authorized to levy taxes on the consumption or sale of electricity but not on generation.

The Union Territory defended the enactment, contending that under Entry 17 of List II, water including water power projects is specifically mentioned, and therefore the State was vested with the power to legislate in respect of regulation of water, which includes levy of water charges.

It was further contended that water falls within the definition of land and minerals, and therefore imposition of water usage charges was justified under Entries 49 and 50 of the State List. On promissory estoppel, it was contended that there can be no promissory estoppel against a legislative enactment.

Lastly, it was contended that even if the levy were assumed to be a tax on generation of electricity, since the Act had been adopted by Parliament at the time of enactment of the Jammu and Kashmir Reorganization Act, 2019, it could be presumed to have the assent of Parliament.

Court's Observation

Adjudicating the matter, the division framed four issues for determination, namely the true nature of the charges sought to be imposed, whether the levy was on drawal of water or on generation of electricity, whether the State Legislature was competent to enact such a law, and whether the levy was legally permissible under the constitutional scheme and the agreements executed between the parties.

The Court noted that the nomenclature given by the legislature to a levy does not determine its true character, and that for determining the true character, the Court has to consider the pith and substance of the legislation.

The Court held that the distinction between a tax and usage charges is that a tax is a compulsory exaction for public purposes, whereas usage charges constitute consideration for supply or consumption, and that in the case of usage charges there is a correlation between the charges collected and the services rendered.

Applying this to the statutory scheme, the Court observed that under the proviso to Section 145(1) of the Act, water usage charges are to recover the cost of the projects and the expenditure incurred on their operation, maintenance and management, but in the case of hydropower projects, the Union Territory or its functionaries have no obligation to incur any expenditure on the operation, maintenance and management of such projects.

The Court further observed that Section 185-A of the Act provides for constitution of a separate fund into which the amount realized as water usage charges from power-generating hydroelectric projects is to be deposited, and that the fund is to be utilized for establishment of hydel projects, buying back hydroelectric power projects, capital investment in transmission and distribution networks, and purchase of power by the State Government. The Court held,

“Thus, it can safely be stated that the water usage charges sought to be levied upon power-generating hydro projects in terms of the Act of 2010 are nothing but a tax. These charges do not possess the characteristics of usage charges or a fee.”

On the second issue, the Court noted that in a conventional hydropower project, water passes through a turbine, generates electricity and is returned to the river, and that water is subjected to non-consumptive use. The Court further noted that the tariff fixed by the Regulatory Authority was based on head height, with the rate per cubic metre increasing in proportion to the height from which water falls, and not on the basis of the quantity of water supplied. The Court held,

“The head height formula for levying the tariff goes on to show that the incidence of the tax is the generation of electricity because the greater the head height, the greater would be the amount of electricity generated. The quantum of water usage charges is proportional to the amount of electricity generated and not to the volume of water used. The generation of electricity is, therefore, the incidence of tax in the present case and not the drawal of water.”

On the third issue, the Court observed that the impugned Act was enacted in the year 2010 when the erstwhile State enjoyed a special status under Article 370, and that except the subjects coming within the exclusive domain of Parliament by virtue of entries in the Seventh Schedule, the residuary powers vested with the erstwhile State. The Court noted that the legislative competence of a legislation has to be tested with reference to the law prevailing at the time of its enactment.

The Court referred to the nine-Judge Bench decision in Mineral Area Development Authority and another v. Steel Authority of India and another (2024), which held that the structure of legislative entries follows an express and deliberate pattern, with general subject matters and taxing entries separately enumerated, and that taxation is considered a distinct matter for purposes of legislative competence.

The Court noted that Entry 53 of List II empowers the State to impose tax on consumption or sale of electricity, but that no entry in List II vests power with the State to impose tax on generation of electricity.

The Court referred to Commissioner of Sales Tax Madhya Pradesh v. Madhya Pradesh Electricity Board (1969) and State of Andhra Pradesh v. National Thermal Power Corporation Ltd. (2002) to hold that electricity is goods, and that generation, transmission, delivery and consumption of electricity are simultaneous.

The Court also referred to M.P. Cements Manufacturers Association v. State of Madhya Pradesh (2004), wherein it was held that Parliament has exclusive legislative competence to legislate with respect to levy of duty on production of electricity, and to the Division Bench decision of the Court in National Hydro-Electric Power Corp. Ltd. and another v. State of J&K and others (2005), which quashed an SRO levying electricity duty on generation of electricity on the ground that it was beyond the legislative competence of the erstwhile State.

The Court held,

“The enactment of the impugned legislation to the extent it seeks to impose tax on generation of electricity was, therefore, beyond the legislative competence of the erstwhile State of J&K. To that extent, the provisions of impugned Act of 2010 are ultra vires the Constitution.”

On the alternative contention that water falls within land or mineral so as to attract Entries 49 and 50 of List II, the Court held that water has been categorized separately under Entry 17 of List II, land separately under Entry 18 with taxing Entry 49, and minerals under Entry 50, and that there is no taxing entry in the State List in respect of water. The Court held,

“If we include the water with land or mineral then Entry 17 of List-II becomes redundant, which could never have been the intention of the Constitution framers. It is to be noted that Entry 17 of List-II, which relates to water is a regulatory entry and it does not vest power with the State to impose tax on water.”

On the contention that the adoption of the Act under the Jammu and Kashmir Reorganization Act, 2019 gave it the assent of Parliament, the Court held that merely because the Act provides for adoption of State enactments does not make them enactments passed by Parliament, and that accepting such an argument would lead to absurdities.

The Court referred to Deep Chand v. State of U.P. (1959) and Krishna Chandra Gangopadhyay v. Union of India (1975), and held,

“A piece of legislation, which is ultra vires the Constitution at the time of its enactment cannot be legitimized by its adoption by the Parliament subsequently.”

On a cumulative consideration of the findings above the writ petitions were allowed. The impugned Act of 2010, to the extent it provides for levying water usage charges upon hydro power projects, was held to amount to imposing a tax on the generation of electricity, and was struck down to that extent as ultra vires the Constitution.

The impugned demand notices issued against the writ petitioners were quashed, and the respondent State was restrained from imposing any tax on the generation of electricity under the garb of water usage charges or any other tax.

Appearances

Petitioners: Advocate Shariq J. Reyaz, Advocate Humaira Sajad, Advocate Rahul Sharma, Advocate Rupali Sharma and Advocate Akshaj Rahmatra; Senior Advocate Pranav Kohli with Advocate Raunak Gupta, Advocate Rahul Sharma, Advocate Rupali Sharma and Advocate Akshaj Rahmatra

Respondents: Senior Additional Advocate General A.R. Malik with Advocate Nisha Kangotra; Deputy Solicitor General of India T.M. Shamsi with Advocate Rehana Qayoom