Water Usage Charges On Hydropower Projects Are Tax On Electricity Generation: J&K And Ladakh High Court Strikes Down Levy

Finding that the erstwhile State Legislature lacked competence to impose such a tax, the Court struck down the Act to that extent, quashed the demand notices and restrained the Union Territory from imposing a generation tax under the guise of water usage charges.

The Court was hearing three writ petitions filed by independent power producers challenging the 2010 Act, the rules framed under it and demands for water usage charges raised against their river-based hydropower projects from 2010 onwards.

A Bench of Justice Rajnesh Oswal and Justice Sanjay Dhar observed: “In the face of the aforesaid facts, water usage cannot be divorced from the generation of electricity, as the same constitutes a single, inescapable event. 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 amounts to tax upon the generation of electricity itself.”

Senior Advocate Pranav Kohli and Advocate Shariq J. Reyaz appeared for the petitioners. Senior Additional Advocate General A.R. Malik appeared for the Union Territory, while Deputy Solicitor General of India T.M. Shamsi appeared for the Union of India.

Background

The petitioners operated river-based hydropower projects allotted by the Jammu and Kashmir Government. The 2010 Act empowered the Water Resources Regulatory Authority to fix water usage charges for several purposes, including electricity generation. The authorities subsequently issued demands under Sections 120, 130 and 145(1)(d).

The power producers contended that water passing through their turbines was returned to the river and was not consumed. They argued that fixing tariffs according to the height from which water fell upon the turbine showed that the levy targeted electricity generation rather than water use.

The Union of India supported the contention that Entry 53 of the State List permitted taxation only on the consumption or sale of electricity and not its generation.

The Union Territory maintained that the levy was regulatory and fell under Entry 17 of the State List concerning water and water power. It alternatively argued that water formed part of land or minerals and could be taxed under Entries 49 or 50. It also contended that the Act stood saved after its adoption under the Jammu and Kashmir Reorganisation Act, 2019.

Court’s Observations

Levy Was A Tax, Not A Usage Charge

The Court distinguished a compulsory tax raised for public purposes from a fee or usage charge linked to a service or quantity consumed. It found that the Union Territory did not operate, maintain or manage the petitioners’ hydropower projects and rendered no corresponding service for the levy.

The Bench noted that Section 185-A directed the proceeds towards establishing or buying back hydroelectric projects, investing in transmission and distribution networks and purchasing power. Those purposes were not connected with services rendered to the projects paying the charge.

The Court held: “The aforesaid provision clearly goes on to show that the water charges sought to be levied upon hydropower projects are not to be applied in connection with any services rendered to such projects, but the same are to be applied for purposes that are neither directly nor indirectly connected with provision of any service to the licensee power-generating projects. Thus, 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. These charges do not possess the characteristics of usage charges or a fee. The nomenclature assigned to the charges sought to be levied upon hydroelectric projects by virtue of the impugned Act is misleading, and it clearly partakes the character of tax.”

Head-Height Formula Targeted Electricity Generation

Referring to Municipal Council, Kota v. Delhi Cloth and General Mills Co. Ltd. (2001), the Court stated that the nature of a levy depends upon its substance, taxable event and incidence rather than its name.

The Bench observed that hydropower projects use water non-consumptively: water passes through a turbine, generates electricity and returns to the river or is discharged downstream.

Under the Regulatory Authority’s 2019 order, the tariff increased with the head height, ranging from ₹0.05 per cubic metre for a height up to 30 metres to ₹0.25 above 90 metres.

The Court observed: “A tariff based on head height is, therefore, a proxy for the hydropower potential rather than a charge for the physical quantity of water supplied. The levy is, therefore, economically directed at hydropower projects and electricity generation. The tariff, as already stated, is proportional to the head height from which the water falls on the turbine and not to the volume of water, which clearly shows that the focus of the tariff is on the generation of electricity and not on the volume of water supplied.”

The Bench noted that similar views had been taken in N.H.P.C. Ltd. v. State of Himachal Pradesh (2024) and T.H.D.C. India Ltd. v. State of Uttarakhand (2026).

State Legislature Lacked Competence

The Court held that legislative competence had to be assessed according to the constitutional framework prevailing when the Act was enacted in 2010.

Relying on Commissioner of Sales Tax v. Madhya Pradesh Electricity Board (1969) and State of Andhra Pradesh v. National Thermal Power Corporation Ltd. (2002), the Bench treated electricity as goods. It further relied on M.P. Cements Manufacturers Association v. State of Madhya Pradesh (2004), which held that Parliament had exclusive competence over a duty imposed on electricity production.

The Court held: “The enactment of the impugned legislation to the extent it seeks to impose tax on generation of electricity was, therefore, beyond the legislative competence of the erstwhile State of J&K. To that extent, the provisions of impugned Act of 2010 are ultra vires the Constitution. Accordingly Issue No.(iii) is answered by holding that imposition of tax on generation of electricity under the guise of water usage charges under the impugned Act of 2010, was beyond the competence of erstwhile State of J&K.”

The Bench added that Entry 17 concerning water was regulatory and had no corresponding taxing entry in the State List. It rejected the attempt to treat water as land or a mineral for taxation under Entries 49 or 50.

The Court also held that adoption of the legislation under the Jammu and Kashmir Reorganisation Act did not transform it into a parliamentary enactment or cure its original lack of legislative competence.

Conclusion

The High Court allowed the writ petitions and struck down the 2010 Act to the extent it imposed water usage charges on the petitioners’ hydropower projects.

The Court quashed the demand notices and restrained the Union Territory from imposing a tax on electricity generation under the guise of water usage charges or any other tax.

Cause Title: M/s Mass N Energy and Others v. Union of India and Others, with Connected Petitions

Appearances

Petitioners: Senior Advocate Pranav Kohli; Advocates Shariq J. Reyaz, Humaira Sajad, Raunak Gupta, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra

Respondents: Senior Additional Advocate General A.R. Malik; Advocate Nisha Kangotra; Deputy Solicitor General of India T.M. Shamsi; Advocate Rehana Qayoom

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