Srinagar, October 29, KDC: The High Court of Jammu and Kashmir and Ladakh has held that the erstwhile state legislature lacked the constitutional power to tax electricity generation, ruling that the subsequent adoption of the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, under the Jammu and Kashmir Reorganisation Act, 2019, could not validate the levy of water usage charges on hydropower projects.
A Division Bench of Justice Rajnesh Oswal and Justice Sanjay Dhar, in a 50-page judgment pronounced on Thursday, held that the water usage charges imposed on the hydropower projects that approached the court amounted in substance to a tax on electricity generation rather than a fee for the use of water. The Bench declared the relevant provisions of the 2010 Act unconstitutional to the extent that they imposed the charges on the petitioners, quashed the impugned demand notices and restrained the government from imposing a tax on electricity generation under the guise of water usage charges or any other tax, reported news agency Kashmir Dot Com.
The ruling came in three writ petitions filed by hydropower companies challenging the statutory provisions, rules and demand notices issued by the authorities for charges relating to electricity generation from 2010 onwards. The lead petition was filed by 11 companies, while the other petitions were filed by M/s Magpie Hydel Construction Operation Industries Pvt. Ltd. and Choudhary Power Projects Pvt. Ltd.
The central issue before the court was whether the levy was a regulatory fee for water use, as argued by the Jammu and Kashmir administration, or a tax on electricity generation beyond the legislative competence of the erstwhile state.
The Bench held that the nature of a levy must be determined by its substance and actual incidence, rather than the terminology used by the authorities. It observed that the charges imposed on the petitioning hydropower projects under the 2010 Act were “nothing but a tax” and did not possess the characteristics of water usage charges or a fee.
In examining whether the levy could qualify as a regulatory fee, the court considered whether the amounts collected bore a sufficient relationship to services rendered or regulatory benefits provided to the projects being charged. It referred to Section 145 of the 2010 Act, which provides for a tariff system for water usage charges through the Water Resources Regulatory Authority, and examined the statutory framework governing the collection and use of the proceeds.
The Bench also considered Section 185-A, under which the charges collected from power-generating hydropower projects were to be deposited in a separate fund. The provisions allowed the money to be used for establishing new hydel and multipurpose hydroelectric projects, buying back existing projects, investing in transmission and distribution networks, and purchasing electricity by the government or its entities, subject to government approval.
The court found that these purposes were not directly or indirectly connected with services rendered to the hydropower projects from which the money was collected. On that basis, it held that the levy could not be justified as a fee for water use.
The tariff structure was another factor considered by the Bench. It examined the order issued by the Jammu and Kashmir State Water Resources Regulatory Authority on April 2, 2019, under which charges were linked to the head height—the vertical fall through which water is channelled to drive a turbine—rather than being calculated solely on the actual volume of water used.
The order prescribed rates of Rs 0.05 per cubic metre for a head height of up to 30 metres, Rs 0.14 for a head height between 61 and 90 metres, and Rs 0.25 for a head height above 90 metres.
The Bench observed that head height reflects the energy potential available from water and that linking the tariff to it indicated that the levy was connected to the potential for generating electricity. Justice Sanjay Dhar, who authored the judgment, noted that the method of calculation showed that the economic subject matter of the levy was the hydropower potential being exploited to generate electricity, with water serving as the medium through which energy was produced.
The court also considered the non-consumptive nature of water use in hydropower generation, in which water passes through turbines to produce electricity rather than being consumed in the process. It assessed this aspect alongside the tariff formula and the statutory scheme in concluding that the levy was, in substance, a tax on electricity generation.
On the constitutional question, the Bench examined the distribution of legislative powers under the Constitution and the relevant entries in the Seventh Schedule. It held that Entry 17 of the State List, which covers water supplies, irrigation, canals, water storage and water power, did not independently confer the power to tax electricity generation.
The court observed that Entry 53 of the State List authorises taxation on the consumption or sale of electricity, but does not extend to the generation of electricity. It considered constitutional principles and judicial precedents, including the Supreme Court’s judgment in Mineral Area Development Authority v. Steel Authority of India, as well as the erstwhile Jammu and Kashmir High Court’s ruling in National Hydro-Electric Power Corporation Ltd. v. State of J&K, which dealt with the state legislature’s competence to levy electricity duty on generation.
The Bench consequently held that the 2010 Act exceeded the legislative competence of the erstwhile state legislature to the extent that it imposed a tax on electricity generation through water usage charges.
The administration had argued that its authority to regulate the storage and use of water, including water used for generating electricity, supported the levy and that the charges were regulatory in nature rather than a tax. It also relied on other entries in the State List in seeking to justify its authority to impose the charges.
The court rejected that reasoning, holding that regulatory powers over water could not be used to create a taxing power over electricity generation. The nature of the levy, it held, had to be assessed on the basis of its substance rather than the description given to it.
The administration further contended that the 2010 Act had been adopted and applied to the Union Territory under the Jammu and Kashmir Reorganisation Act, 2019, and that its adoption under a parliamentary law gave it the necessary legal backing.
The Bench rejected this argument as well, holding that subsequent adoption under the Reorganisation Act could not cure the lack of legislative competence at the time the law was enacted by the erstwhile state legislature.
Allowing the petitions, the High Court struck down the provisions of the 2010 Act only to the extent that they provided for water usage charges on the petitioning hydropower projects. It also quashed the demand notices challenged in the cases and restrained the government from imposing a tax on electricity generation under the guise of water usage charges or any other tax. (KDC)
