Srinagar: The High Court of Jammu & Kashmir and Ladakh on Thursday struck down provisions of the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, to the extent they impose water usage charges on hydropower projects, holding that the levy tax on electricity generation was beyond the legislative competence of the erstwhile state of Jammu and Kashmir.
A Division Bench comprising Justice Sanjay Dhar and Justice Rajnesh Oswal allowed three connected writ petitions filed by independent power producers, quashed the demand notices issued against them and restrained the authorities from imposing any tax on electricity generation under the guise of water usage charges or any other tax.
The petitions were filed by 11 companies led by Mass Energy Pvt. Ltd., Magpie Hydel Construction Operation Industries Pvt. Ltd. and Choudhary Power Projects Pvt. Ltd., challenging the statutory provisions and demand notices seeking recovery of water usage charges for hydropower generation from 2010 onwards.
The petitioners argued that the charges were, in substance, a tax on electricity generation, rather than a fee for the use of water.
They also contended that hydropower projects use water in a non-consumptive manner and that their contractual obligation to provide 12 percent free electricity to the government already constituted a form of royalty for the use of water resources.
The Government of India had also maintained that the state legislature was not competent to impose a tax on electricity generation.
Rejecting the UT government’s defence of the levy, the court held that the nature of a charge must be determined by its substance and purpose, rather than the nomenclature assigned to it.
The Bench noted that the revenue collected from hydropower projects was earmarked for broader power-sector purposes, including the establishment of hydel projects, investment in transmission and distribution infrastructure, and the purchase of electricity, rather than services rendered to the projects paying the charges.
The court observed that the absence of a corresponding service to the hydropower operators reinforced its conclusion that the levy was a tax and not a regulatory fee or water usage charge.
The Bench further held that the levy was linked to electricity generation rather than merely to the quantity of water drawn. It consequently concluded that the taxable event was the generation of electricity.
The judgment held that, at the time the 2010 legislation was enacted, the erstwhile state legislature lacked the requisite competence to impose a tax on electricity generation.
It also rejected the government’s argument that the adoption of the legislation under the Jammu and Kashmir Reorganisation Act, 2019, could validate the levy.
It held that the subsequent adoption of a state enactment could not cure a constitutional defect arising from the legislature’s lack of competence when the law was originally enacted.
The court further observed that Entry 17 of the State List, which deals with water and water power, is regulatory in nature and does not independently confer the power to tax water.
It held that there was no corresponding taxing entry in the State List authorising a tax on water as a separate subject.
Allowing the petitions, the court declared the impugned provisions unconstitutional to the extent they imposed water usage charges on the petitioners’ hydropower projects, struck down the levy to that extent and quashed the consequential demand notices.
The ruling marks a significant legal development for hydropower producers like the Government of India owned National Hydroelectric Power Corporation (NHPC).
The profit making hydropower utility of India is the major exploiter of water resources in Jammu and Kashmir.
It is mentionable that the energy deficient erstwhile state imports electricity worth thousands of crores of rupees from the rest of the country annually.
