State cannot levy Water cess on Hydroelectricity under garb of water usage: Himachal Pradesh High Court

State is not competent to levy water cess on Hydropower generation under guise of water usage, the Himachal Pradesh High Court held on Tuesday while quashing the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023 [NHPC Ltd v. State of HP & Ors]..A division bench of Justice Tarlok Singh Chauhan and Justice Satyen Vaidya ruled that the State legislature lacked the competence to enact a law for levy of cess on water usage for generation of electricity since hydroelectricity and water power is a field occupied by the parliament. "The provisions of the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023, are declared to be beyond the legislative competence of the State Government in terms of Articles 246 and 265 of the Constitution of India and, thus, ultra vires the Constitution," the Court held.The Court said that the Act imposes tax on generation of electricity and not merely on water as a subject or on drawl of water, which the State is not competent to do. "It also imposes an inter-State tax on inter-State supply of electricity for which again the State is not competent to do so," the Court added.Hence, it quashed the law and ordered refund of the amount recovered from the power generation companies. .It opined that the law essentially taxes the generation of electricity, after it found that the height from which the water falls was set as a determining factor for the rate of cess.“It is “generation of electricity” that is the “bone” and “water drawn” is only the “flesh”. The taxable event is “hydropower generation” and not the “usage of water” because if there is no generation, then there is no “tax”. Moreover, if the cess was on “usage of water”, then how could the height, at which the water falls on the turbine, be made the taxable event?” asked the Court. .Himachal government had introduced The Himachal Pradesh Water Cess on Hydropower Generation Act in 2023 with an aim to improve its revenue generation by imposing water cess on hydro power generation. There were 172 hydropower projects in the State when the law was passed by the assembly. However, it faced stiff opposition from the power generation companies..A total of 39 petitions were filed before the High Court by the power companies including public sector companies like NHPC Limited..The power generation companies had mainly contended that the State lacked the legislative competence to frame a law to levy cess on water usage for generation of electricity.The State's defence was that since water is a State’s subject matter and comes under Entry 17 of List-II, it has the legislative competence to make such law.Union of India had supported the stand of power generation companies..The Court on consideration of the submissions rejected the State’s reliance on Entries 17 and 18 of the List-II.“In this regard, it is a settled principle of law that taxation entries are distinct from general regulatory entries. Entries 1 to 44 in List-II are regulatory, whereas Entries 45 to 63 are taxing entries. Therefore, the legislative competence to impose any tax on water drawn for hydropower generation cannot be imposed by the State by referring to Entries 17 & 18 of List-II being regulatory entry,” it noted..The Court also refused to accept the State’s alternative argument that the levy can be justified as a ‘fee’ on the basis of Entries 17 and 18 read with Entry 66 of List-II.It opined that the State lacks the competence to levy the cess as a fee. Further, the Court found that the entire field of legislation concerning water power or hydropower projects under the Electricity Act of 2003 is occupied by parliament. “Therefore, the State lacks competence to levy any fee under the garb of water cess by relying upon Entries 17 & 18, and 66 of List-II,” it concluded..In conclusion, the Court said that once it is held that the cess sought to be imposed by the Act is not on the “water drawn” but on the “generation of electricity”, then it is the Central Government alone which could levy tax on generation of electricity.The Court also found that the power of fixation of rates has been delegated to the Himachal Pradesh government i.e., the executive by the State legislature without any guidance."On account of having delegated power to fix rates of impugned levy to Government of Himachal Pradesh without any legislative policy or guidance, the impugned Act is unconstitutional," the Court said..Senior Advocate Tushar Mehta with Advocates Vijay Kumar Arora and Avneesh Arputtham represented the NHPC Limited.Senior Advocates Abhishek Manu Singhvi and RL Sood with Advocates HS Chandoke, Anant Garg and Janesh Gupta represented JSW Hydro Energy LimitedSenior Advocate Dushyant Dave, advocate General Anup Rattan, Senior Additional Advocate Generals IN Mehta and Yashwardhan Chauhan, Additional Advocate Generals Navlesh Verma and Sharmila Patial and Deputy Advocate General JS Guleria represented the State..[Read Judgment]