SRINAGAR: The Jammu Kashmir and Ladakh High Court has struck down provisions of the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, insofar as they authorise the imposition of water usage charges on hydroelectric projects, holding that the levy amounts to an unconstitutional tax on electricity generation beyond the legislative competence of the erstwhile state legislature.
A division bench of Justice Rajnesh Oswal and Justice Sanjay Dhar allowed a batch of three petitions filed by independent power producers, quashed the consequential demand notices and held that the authorities could not impose such charges on hydropower projects under the provisions in question. The judgment was pronounced on October 29, 2026, after the court had reserved its decision on September 2.
The petitions challenged the provisions of the 2010 Act, along with the rules framed under it in 2011, under which the authorities had been raising demands for water usage charges against river-based power projects since 2010. The dispute centred on Sections 120, 130 and 145(1)(d) of the legislation and the tariff mechanism adopted by the Jammu and Kashmir State Water Resources Regulatory Authority.
The petitioners, including M/s Mass N Energy Pvt Ltd, M/s Magpie Hydel Construction Operation Industries Pvt Ltd and Choudhary Power Projects Pvt Ltd, argued that the levy was, in substance, a tax on electricity generation rather than a charge for the use of water.
They submitted that hydropower generation involves non-consumptive use of water, as it is channelled through turbines and returned downstream without being depleted. The companies also questioned the method used to calculate the charges, arguing that the tariff was linked to the head height — the vertical drop through which water flows — rather than the volume of water used.
According to the petitioners, this method demonstrated that the levy was linked to the electricity-generating capacity of a project and not to the consumption or use of water. They also contended that the charges were contrary to their contractual arrangements, under which they were already required to provide 12 per cent free electricity to the government as royalty, and invoked the doctrines of promissory estoppel and legitimate expectation.
The Union of India supported the challenge, arguing that the state legislature did not have the constitutional authority to impose a tax on electricity generation. Appearing through Deputy Solicitor General of India T M Shamsi, assisted by Rehana Qayoom, the Union submitted that Entry 53 of List II of the Seventh Schedule to the Constitution empowers states to levy taxes only on the consumption or sale of electricity, not its generation.
The Union Territory administration defended the legislation, maintaining that the levy was within the state’s powers under Entry 17 of List II, which deals with water, water supplies, irrigation and water power. It also relied on Entries 49 and 50, relating to taxes on lands and buildings and taxes on mineral rights, to support the levy.
The UT further argued that the legislation had been adopted following the Jammu and Kashmir Reorganisation Act, 2019, and contended that the government was entitled to recover the charges under the statutory framework.
The petitioners were represented by a team of advocates that included senior advocate Pranav Kohli, Shariq J Reyaz, Humaira Sajad, Raunak Gupta, Rahul Sharma, Rupali Sharma and Akshaj Rahmatra. The Union Territory was represented by Senior Additional Advocate General A R Malik, assisted by Nisha Kangotra, while T M Shamsi, Deputy Solicitor General of India, appeared for the Union government with Rehana Qayoom.
Writing the judgment, Justice Sanjay Dhar observed that the name assigned to a levy by the legislature could not determine its actual legal character.
“The nomenclature that the legislature has ascribed to the tax does not determine either the nature of the levy or its true and essential character,” the bench held.
Examining the tariff mechanism, the court found that linking the charges to the head height of a hydropower project connected the levy directly to electricity production. It observed: “The head height formula for levying the tariff goes on to show that the incidence of the tax is the generation of electricity because the greater the head height, the greater would be the amount of electricity generated.”
The bench also considered whether the charges could be justified as a fee for services rendered by the government. It noted that hydropower projects did not receive any corresponding municipal, irrigation or other operational services in return for the amounts demanded. The judgment also referred to Section 185-A of the Act, under which the collected amounts were placed in a fund earmarked for capital investment in transmission networks and power purchases.
On examining the substance and effect of the levy, the court concluded that it was directed at electricity generation and could not be sustained merely by describing it as a water usage charge.
The bench held that the erstwhile state legislature lacked the legislative competence to introduce such a tax. It also rejected the argument that the adoption of the legislation following the reorganisation of Jammu and Kashmir in 2019 could validate provisions that were constitutionally beyond the legislature’s powers when enacted.
The court accordingly declared the challenged provisions unconstitutional to the extent that they authorised the levy of water usage charges on hydropower projects and quashed the consequential demand notices, bringing relief to the independent power producers that had contested the demands.
