State Not Competent To Levy Water Cess On Hydropower Generation Under Guise Of Water Usage: Himachal Pradesh HC

The Himachal Pradesh High Court has held that the State is not competent to levy water cess on Hydropower generation under the guise of water usage.

Declaring that the provisions of the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023, are beyond the legislative competence of the State Government, the Bench of Justice Tarlok Singh Chauhan and Justice Satyen Vaidya observed that "in the instant cases, the levy being imposed on electricity generation and supply, which are inextricable parts of the single event which is taxed under the Impugned Act i.e., “water drawn for hydropower generation”, which the State is not competent to do. It appears that the very definition of “water source” has been altered to include generation of electricity because the tax is not being imposed merely on the drawl of water but for the generation of electricity and the levy in turn is based, as is evident from the quantum of levy, which is based on the head height and not on the water drawn."

With that background, it was held that, "considering the charging section, taxable event and nature of levying under the impugned Act as well as subjecting the impugned Act to the test of “pith and substance”, it is absolutely clear that the impugned 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 interState supply of electricity for which again the State is not competent to do so."

Senior Counsel Tushar Mehta, along with others, appeared for the petitioner, while Senior Advocate Dushyant Dave, AG Anup Rattan, Senior AAGs IN Mehta, Yashwardhan Chauhan, AAGs Navlesh Verma, Sharmila Patial and Deputy AG JS Guleria appeared for the respondents.

In 2023, the Himachal Pradesh government introduced The Himachal Pradesh Water Cess on Hydropower Generation Act, aiming to enhance revenue by imposing water cess on hydro power generation. Despite having 172 hydropower projects in the state when the law was enacted, it encountered strong opposition from power generation companies.

Notably, 39 petitions, including those from public sector entities like NHPC Limited, were filed before the High Court by these companies.

The central argument of the power companies was that the state lacked the legislative authority to enact a law imposing a cess on water usage for electricity generation. In response, the State justified its action by asserting that water, falling under Entry 17 of List-II and being a state subject, granted it the legislative competence to formulate such a law. The Union of India aligned with the stance of the power generation companies.

The High Court, allowing the petitions, made the following observations:

(i) 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.

(ii) Consequently, the Himachal Pradesh Water Cess on Hydropower Electricity Generation Rules 2023, are also quashed and set aside.

(iii) Sections 10 and 15 of the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023, as have been made applicable to the existing projects, are also declared to be ultra vires the Constitution and are accordingly quashed and set aside.

(iv) The amount, if any, recovered by the respondents from the petitioners under the provisions of the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023 and the Rules framed thereunder are ordered to be refunded within four weeks from today.

(v) The letter/notice issued by the State Government/Himachal Pradesh State Commission for Water Cess on Hydropower Generation pursuant to the impugned Act, Rules, seeking recovery of water cess from the petitioners, are declared as illegal and are accordingly quashed and set aside. 

Appearances:

Petitioner: Senior Advocate Tushar Mehta, Counsels Vijay Kumar Arora, Avneesh Arputtham

Respondent: Senior Advocate Dushyant Dave, AG Anup Rattan, Senior AAGs IN Mehta, Yashwardhan Chauhan, AAGs Navlesh Verma, Sharmila Patial, Deputy AG JS Guleria

Cause Title: NHPC Ltd. vs State of HP & Ors.

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