SRINAGAR: The Jammu and Kashmir High Court has struck down the water usage charges imposed on hydropower projects in the Union Territory. It held that the levy is, in substance, a tax on the generation of electricity. The erstwhile State Legislature had no competence to impose it. The court quashed every demand notice issued to the petitioners and restrained the government from taxing generation of electricity “under the garb of water usage charges or any other tax”.
A Division Bench of Justice Rajnesh Oswal and Justice Sanjay Dhar decided three connected writ petitions together. Justice Dhar authored the judgment. It was reserved on September 2 and pronounced in full today.
Background Story
The Legislature of the erstwhile State enacted the Jammu and Kashmir Water Resources (Regulation and Management) Act in 2010. Rules followed in 2011. The law allows water usage charges for several purposes. One of them is the use of water to generate electricity.
Under Section 128, the Water Resources Regulatory Authority fixes the charges. Section 145 lists its functions, including fixing charges for power generation. The proviso says the charges must at least recover project costs and the expenditure on operation, maintenance and management.
The authorities issued demand notices to power producers from 2010 onwards. They acted under Sections 120, 130 and 145(1)(d) of the Act. The producers then went to court.
WP(C) 3008/2024 was filed in Srinagar by eleven companies. They are Mass N Energy, Gousia Road Construction Co., Himalayan Musk Power, O2Z Trading and Industries, Renergy Power Producer, Pahalnar Power, SA Power Utilities, Khari Hydro Power Project, Sharika Enterprises, P&R Engineering Services and Rouf Infrastructures. All hold letters of allotment for independent hydro projects.
WP(C) 3324/2025 was filed in Jammu by Magpie Hydel Construction Operation Industries Pvt. Ltd. It was allotted small hydro projects at Mandi, Poonch, Athwatoo Bandipora and Tangmarg, Drang. WP(C) 3329/2025 was filed by Choudhary Power Projects Pvt. Ltd. It holds a small hydro contract on the Upper Kalnai River in Kishtwar. All petitioners run river based projects.
Counsel Appeared
In the Srinagar petition, the petitioners were represented by advocates Shariq J. Reyaz, Humaira Sajad, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra. In the Jammu petitions, Senior Advocate Pranav Kohli appeared with advocates Raunak Gupta, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra.
For the respondents, Senior AAG A. R. Malik appeared with advocate Nisha Kangotra. In the Srinagar matter, DSGI T. M. Shamsi appeared with advocate Rehana Qayoom.
Petitioners’ Case
The producers said the government was taxing electricity generation under the label of water charges. They argued that hydropower use is not consumptive. Water passes through the turbine and returns to the river. They pointed to the Authority’s order of April 2, 2019, which fixed rates by head height and not by the quantity of water used.
They also relied on their contracts. These oblige them to give 12 per cent free electricity to the government. The petitioners called this royalty for the use of water. They said the State Hydro Power Policy had no provision for any water charge or cess. They claimed an assurance that no extra charge would come during the 40 year project period. On that basis, they pleaded promissory estoppel and legitimate expectation.
The Union of India backed the petitioners on the central question. It said the State’s taxing power under Entry 53 of the State List covers consumption or sale of electricity, not generation. It argued that the levy would be passed on to consumers, who may live in other States. It said the taxable event arises from use of water for generating power, so the levy is a tax on generation in pith and substance.
Government’s Defence
The Union Territory argued that the Act fits the National Water Policy. It said Entry 17 of the State List, which covers water and water power, lets the State regulate water and levy charges. It also claimed that water falls within “land” under Entry 49 and “minerals” under Entry 50. It said there can be no promissory estoppel against legislation, because any promise came from the executive.
As a last line of defence, it said the Act was adopted by Parliament through the J&K Reorganisation Act, 2019. Parliament’s assent, it argued, could therefore be presumed.
Court’s Reasoning
The bench framed four issues. The first was the true nature of the charges. Citing the Supreme Court in Jalkal Vibhag Nagar Nigam, it said the name given to a levy does not decide its character. Citing Hingir Rampur Coal, it said a fee needs a quid pro quo, while a tax does not.
The bench found no service flowing to hydropower projects in return for the charges. The government has no duty to spend on their operation or maintenance. Section 185-A, it noted, sends the money to a separate fund. That fund pays for new hydel projects, buying back existing ones, transmission and distribution networks and power purchase.
“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 bench said. The name given to the levy, it added, “is misleading”.
Tariff Formula
The second issue was whether the tax falls on water or on electricity. The bench studied the Authority’s Order No. 39/JKSWRRA of 2019. The tariff is Rs 0.05 per cubic metre for a head height up to 30 metres. It is Rs 0.12 for 31 to 60 metres and Rs 0.14 for 61 to 90 metres. Above 90 metres, it is Rs 0.25.
The bench said the rate tracks the height of the fall and not the volume of water. Head height, it said, reflects the energy available for conversion into electricity. It called the tariff “a proxy for the hydropower potential rather than a charge for the physical quantity of water supplied”.
Water use and generation, the court said, are “a single, inescapable event”. The greater the head, the greater the electricity produced. So the incidence of tax is generation, not drawal of water. The bench noted that the Himachal Pradesh High Court took a similar view in an NHPC case decided on March 5, 2024. The Uttarakhand High Court did the same in a THDC case decided on April 27, 2026.
Legislative Competence
The third issue was whether the State could impose such a tax. The bench tested competence by the law as it stood in 2010. Then, the erstwhile State enjoyed special status under Article 370. Entry 97 of the Union List, the residuary entry, did not apply to it. Residuary powers lay with its Legislature.
Even so, the bench found no State entry that allows a tax on generation. Entry 53 covers only consumption or sale. Relying on the nine judge ruling in Mineral Area Development Authority, it stressed that taxing entries are separate and exclusive. A taxing power cannot be traced to a general entry.
The petitioners argued that the field belonged to Parliament under unamended Entry 84 of the Union List. The bench agreed. It cited the Supreme Court in Commissioner of Sales Tax v. Madhya Pradesh Electricity Board and State of Andhra Pradesh v. National Thermal Power Corporation to hold that electricity is goods. It relied on M.P. Cements Manufacturers Association, which held that Parliament alone may tax production of electricity.
It also recalled a 2005 Division Bench ruling of its own in National Hydro Electric Power Corporation v. State of J&K. That ruling quashed SRO 141 of 1999, which imposed electricity duty on generation.
Reorganisation Plea
The bench was blunt about the Reorganisation Act argument. It called it “an attempt in desperation to save the impugned legislation”. The 2019 Act, it said, saves some State laws and adopts others. That does not turn them into Acts of Parliament. Accepting the plea would make a subject reserved for the Union Territory a Union subject. The bench pointed to Section 32(1), which defines the Union Territory’s legislative and executive powers.
A law beyond the Legislature’s power at enactment, it added, is void from the start. Citing Deep Chand v. State of U.P. and Krishna Chandra Gangopadhyaya, it called such a law “stillborn legislation”. It said the Reorganisation Act cannot cure that defect.
The bench also dealt with the “land” and “minerals” plea. Water has its own entry, Entry 17, which is regulatory and carries no power to tax. Land and minerals have their own taxing entries, 49 and 50. The State List has no taxing entry for water. The cases cited by the government, it said, concerned taxes on land or minerals and not on water as such.
The court noted that the Act’s charges on users other than hydropower units remain within the State’s competence. A tax on water would not. Since the first three issues decided the matter, the bench called the fourth, on the contracts and estoppel, redundant. It did not decide it.
The Verdict
Allowing the petitions, the bench held that the 2010 Act, to the extent it provides for water usage charges on hydropower projects, imposes a tax on the generation of electricity. The State Legislature, it ruled, did not have the competence to impose that tax. The Act was declared ultra vires the Constitution and struck down to that extent. The impugned demand notices against the writ petitioners were quashed. The government was restrained from imposing any tax on the generation of electricity, whether under water usage charges or any other name.
