Jammu and Kashmir High Court strikes down water usage charges on hydropower projects under 2010 law

The High Court of Jammu and Kashmir and Ladakh has struck down provisions of the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, to the extent that they levy water usage charges on hydropower projects.

A Division Bench comprising Justice Rajnesh Oswal and Justice Sanjay Dhar passed the ruling on finding that the "water use charge" was, in substance, an unpermissible tax on the generation of electricity.

"The impugned Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, to the extent it provides for levying water usage charges upon the hydro power projects, amounts to imposing a tax on the generation of electricity and, therefore, the State Legislature did not have the competence to impose such tax ... The impugned enactment, to the extent it imposes water usage charges upon the petitioners, is held to be ultra vires the Constitution and is struck down to the said extent," the Court held.

The Court reasoned that there is no expenditure being incurred by the government for the benefit of hydropower project licensees using the funds collected by the so-called water use charges.

Rather, Section 185-A of the 2010 Act said that the water charges collected from hydroelectric projects would go to a fund used to establish hydel projects, buy back hydroelectric power projects, for capital investment in transmission and distribution networks, and for the purchase of power by the State.

In other words, there was no element of quid pro quo involved in collecting the water charges from hydropower project licencees. In view of this, the Court held,

“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."

The Court added that the said tax is not being imposed on the sale or consumption of electricity, but rather on its generagtion.

"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, [to a] tax upon the generation of electricity itself,” it observed.

The Court pointed out that the then State of Jammu and Kashmir (as it was before its special status was taken away through the abrogation of Article 370 of the Constitution, and it was reorganised into a Union Territory) did not have the legislative competence to impose such a tax under the 2010 law.

The Court explained that Entry 53 of List II of the Seventh Schedule to the Constitution empowered the State to tax the consumption or sale of electricity, but not its generation. Therefore, the Court quashed the water "charge" levied under the 2010 law and corresponding rules.

The judgment was passed on three writ petitions filed by independent power producers operating river-based hydroelectric projects in Jammu and Kashmir. They challenged the 2010 Act and rules framed under it to the extent they levied water usage charges for the generation of electricity. They also challenged demand notices issued to them for the collection of water use charges.

The Jammu and Kashmir government defended the enactment by contending that under Entry 17 of List II of the Constitution's Seventh Schedule, water - including water power projects - is specifically mentioned. Therefore, the State was vested with the power to regulate matters concerning the use of water, which includes the levy of water charges.

The Jammu and Kashmir government added that even if the levy were assumed to be a tax on the generation of electricity (which States do not have power to impose), the 2010 Act had since been adopted by Parliament through the Jammu and Kashmir Reorganisation Act, 2019, enacted after the abrogation of Article 370.

Therefore, it could be presumed to have the assent of Parliament, the Jammu and Kashmir government said.

The Court, however, rejected these arguments. On the contention that the 2010 law can now been deemed to be an enactment by the Parliament, the Court said,

“Merely because the (2019) Act provides for adoption of State enactments and saves their application to UTs of J&K and Ladakh, the said enactments do not become the enactments passed by the Parliament.”

The Court further held that a law which was unconstitutional for want of legislative competence when enacted could not subsequently be validated merely because it was adopted by Parliament.

“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,” the Court said.

The demand notices issued against the writ petitioners under the 2010 law and its rules were also quashed.

"The respondent-State is restrained from imposing any tax on the generation of electricity under the garb of water usage charges or any other tax," the Court added.

Senior Advocate Pranav Kohli with advocates Raunak Gupta, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra, and advocates Shariq J Reyaz, Humaira Sajad, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra represented various petitioners.

Senior Additional Advocate General AR Malik with advocate Nisha Kangotra and Deputy Solicitor General of India TM Shamsi, with advocate Rehana Qayoom represented various respondents.

[Read Judgment]