The High Court of Jammu & Kashmir and Ladakh at Jammu has struck down the levy of water usage charges on hydropower projects imposed under the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010. A Division Bench comprising Justice Rajnesh Oswal and Justice Sanjay Dhar held that the charge is, in substance and effect, a tax on the generation of electricity. The court ruled that the erstwhile State Legislature lacked the legislative competence to impose such a tax.
The judgment was delivered in a batch of three writ petitions filed by independent power producers operating river-based hydroelectric projects in the Union Territory. The petitioners challenged the constitutional validity of the 2010 Act and the rules framed thereunder to the extent they levied water usage charges for electricity generation. They also challenged demand notices issued from 2010 onwards under Sections 120, 130, and 145(1)(d) of the Act.
Why did the High Court hold that water usage charges constitute a tax on electricity generation?
The Bench observed that 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 imposed at any stage prior to or during the generation of power amounts, in substance and effect, to a tax upon the generation of electricity itself.
The petitioners contended that the Water Resources Regulatory Authority had fixed the charges based on the head height from which water is deployed to propel the turbine, rather than the quantum of water used. This methodology, they argued, demonstrated that the exaction was a tax on generation. The Union of India supported this stance, submitting that under Entry 53 of List II of the Seventh Schedule, States are authorized to levy taxes on the consumption or sale of electricity, but not on generation.
The Union Territory defended the enactment relying on Entry 17 of List II, which covers water, including water power. It argued that the State was vested with the power to legislate on the regulation of water, including the levy of water charges. It further contended that water falls within the definition of land and minerals, justifying the levy under Entries 49 and 50 of the State List.
Rejecting these arguments, the court determined that the true nature of the levy was a tax on generation. Since the legislative field of taxes on generation of electricity is not included in the State List, the erstwhile State Legislature lacked the competence to enact the impugned provisions.
Comparison of Legislative Entries Cited
Entry | List | Subject Matter | Party Reliance |
|---|---|---|---|
Entry 17 | List II (State List) | Water, including water supplies, irrigation and canals, drainage and embankments, water storage and water power | Union Territory (Respondent) |
Entry 49 | List II (State List) | Taxes on lands and buildings | Union Territory (Respondent) |
Entry 50 | List II (State List) | Taxes on mineral rights subject to limitations imposed by Parliament | Union Territory (Respondent) |
Entry 53 | List II (State List) | Taxes on the consumption or sale of electricity | Union of India / Petitioners |
The court also addressed the petitioners' plea of promissory estoppel, noting their contention that the State Hydro Power Policy did not provide for water usage charges or cess and that they were contractually bound to provide 12 percent free electricity to the government as royalty for water use. The respondents argued that there can be no promissory estoppel against a legislative enactment. The Bench, having declared the levy ultra vires on the ground of legislative competence, did not find it necessary to adjudicate the estoppel argument separately.
The court struck down the impugned enactment to the extent it imposes water usage charges on hydropower projects for generation of electricity. It further restrained the State from imposing any tax on the generation of electricity under the garb of water usage charges or any other nomenclature.