Jammu and Kashmir HC strikes down water usage charges on hydropower as a tax on electricity generation

A division bench at Srinagar held that the Jammu and Kashmir Water Resources Act, 2010, to the extent it levies water usage charges on hydro projects, imposes a tax on generation that the erstwhile State legislature had no competence to levy, struck it down to that extent and quashed demand notices against thirteen independent power producers.

Water usage charges that the Jammu and Kashmir administration has been demanding from private hydropower developers since 2010 are a tax on the generation of electricity dressed up as a fee, and the erstwhile State legislature had no power to impose one, the High Court of Jammu and Kashmir and Ladakh held on 29 October 2026. A division bench of Justice Rajnesh Oswal and Justice Sanjay Dhar, sitting at Srinagar, struck down the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, to the extent it levies such charges on hydro projects, quashed the demand notices issued to thirteen independent power producers, and restrained the Union Territory from taxing generation under that or any other label. The decisive clue, in the judgment written by Justice Sanjay Dhar, was the tariff itself: a rate per cubic metre that rises with the height from which the water falls on the turbine, which the court called “a proxy for the hydropower potential” rather than a charge for water.

Thirteen developers, three petitions, one Act

The lead petition, WP(C) No. 3008 of 2024 on the Srinagar Wing, was filed by eleven companies to whom the Government had allotted independent hydro projects: M/s Mass N Ergy, described in the judgment as Mass N Energy Pvt. Ltd., 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. Two petitions from the Jammu Wing were heard with it: WP(C) No. 3324 of 2025 by Magpie Hydel Construction Operation Industries Pvt. Ltd., allotted small hydro projects at Mandi in Poonch, Athwatoo in Bandipora, Tangmarg and Drang, and WP(C) No. 3329 of 2025 by Choudhary Power Projects Pvt. Ltd., allotted a project on the Upper Kalnai river in Kishtwar. All run river-based plants and use water to generate electricity.

Mr. Shariq J. Reyaz, with Ms. Humaira Sajad, Mr. Rahul Sharma, Ms. Rupali Sharma and Mr. Akshaj Rahmatra, appeared for the eleven companies; Mr. Pranav Kohli, Senior Advocate, with Ms. Raunak Gupta and the same team, for Magpie and Choudhary. Mr. A.R. Malik, Senior Additional Advocate General, with Ms. Nisha Kangotra, defended the Union Territory, and Mr. T.M. Shamsi, Deputy Solicitor General of India, with Ms. Rehana Qayoom, appeared for the Union of India. The matters were reserved on 2 September 2026.

The 2010 Act, passed by the legislature of the former State, and the Rules framed under it in 2011 provide for water usage charges on several categories of use, including generation of electricity. Acting under Sections 120, 130 and 145(1)(d), the administration raised demand notices on the developers for charges running from 2010 onwards. The developers challenged both the provisions and the notices.

What each side said

The developers argued that under the garb of water usage charges the Union Territory was levying a tax on generation of electricity, a field outside the State List. A hydro plant’s use of water is non-consumptive, they said, and the Water Resources Regulatory Authority’s order of 2 April 2019 fixed the charge by the head height from which water is deployed to drive the turbine, not by the quantity of water used, which betrayed the true target. They added that their agreements with the Government oblige them to supply 12 per cent free electricity as royalty for the use of water, which estopped the State from adding a further charge; that the State Hydro Power Policy contained no water cess, so promissory estoppel applied; and that they had a legitimate expectation of no such levy over the 40-year project period.

The Union of India sided with the developers. Entry 53 of List II permits a State to tax the consumption or sale of electricity, not its generation, and no tax not specifically mentioned in the State List can be levied under any guise. The taxable event under the Act, it said, was not the use of water but its use for generation, so the levy was in pith and substance a tax on generation that would ultimately be passed on to consumers, some of them in other States.

The Union Territory defended the Act as regulatory legislation under Entry 17 of List II, which covers water, water supplies, water storage and water power, and said the charges were in keeping with the National Water Policy and the State’s wish to conserve and harness its water. Alternatively, water was part of land and so taxable under Entry 49, or a mineral taxable under Entry 50. There could be no promissory estoppel against a statute, since any promise had come from the executive. And even if the levy were a tax on generation, the Act had been adopted by Parliament through the Jammu and Kashmir Reorganisation Act, 2019, and could be presumed to carry Parliament’s assent.

The framework: taxing entries are separate from general entries

The bench framed four issues: the true nature of the charge; if a tax, whether it fell on the drawal of water or on generation; if on generation, whether the State legislature was competent; and whether, as a water tax or usage charge, it was permissible under the Constitution and the parties’ agreements. Before answering, it set out the statutory scheme at length: the preamble, the definitions of beneficiary, category of use, electricity, user and water usage charges in Section 2, the licensing provisions in Sections 90 to 97, the Authority’s power under Section 128 to fix charges and review them every three years, recovery under Section 130, assessment by the Assistant Executive Engineer under Section 131, the Authority’s functions under Section 145, and Section 185-A, which creates a separate fund for charges realised from hydroelectric generators.

On the constitutional side the court relied heavily on the nine-judge decision in Mineral Area Development Authority v. Steel Authority of India, quoting its account of Articles 245 and 246, federal supremacy, and the deliberate division of the Seventh Schedule into general and taxing entries: a legislature does not derive the power to tax from a general entry, the taxing powers of the Union and the States are mutually exclusive, and a taxing power enumerated in one list is automatically excluded from the others. It also drew on State of Karnataka v. State of Meghalaya for the distinction between the subject of a tax and its measure, and for the three-step approach to apparent conflicts between entries. Entries, it added, are to be read liberally and with all ancillary matters, but words cannot be given an unnatural meaning.

No service, no quid pro quo: the charge is a tax

On the first issue the bench began with Jalkal Vibhag Nagar Nigam v. Pradeshiya Industrial and Investment Corporation, where the Supreme Court held that the label a legislature attaches to a levy does not fix its character, and with Hingir-Rampur Coal Co. v. State of Orissa on the difference between a tax, a compulsory exaction for public purposes, and a fee, which is levied for services rendered and carries an element of quid pro quo. Usage charges, the court said, are consideration linked to the quantity supplied or consumed, and must correlate with a service.

Tested against that, the hydro charges failed. The proviso to Section 145(1)(d) says water usage charges shall at least recover the cost of the project and the expenditure on its operation, maintenance and management; but the Union Territory incurs no such expenditure on a privately built and run hydro plant, and provides it no service in return for the charge. For other users the levy might well be a fee, the court accepted, but for hydropower projects there was no quid pro quo at all. Section 185-A settled the point: the charges collected from hydro generators go into a dedicated fund to be spent on building new hydel projects, buying back existing ones, investing in transmission and distribution, and purchasing power, purposes with no connection, direct or indirect, to any service for the paying licensee. The charge was therefore a tax, and its name misleading.

Priced by the fall, not by the flow

The second issue turned on the taxable event. Applying Municipal Council, Kota v. Delhi Cloth and General Mills, which requires a court to look to the charge, the taxable event and the incidence rather than the name, the bench described how a conventional hydro plant works: water passes through a turbine, generates electricity and returns to the river, a non-consumptive use quite unlike irrigation or industry. It then examined the Authority’s latest tariff, Order No. 39/JKSWRRA of 2019 dated 2 April 2019. The rate is Rs 0.05 per cubic metre where the head height is up to 30 metres, Rs 0.12 for 31 to 60 metres, Rs 0.14 for 61 to 90 metres and Rs 0.25 above 90 metres.

The power available from water, the court observed, depends on the volume flowing and the head; a tariff that climbs with the vertical fall through the turbine is priced on energy potential, not on the physical quantity of water drawn. In a hydro plant the use of water and the generation of electricity are a single, inseparable event, so any levy imposed before or during generation is in substance a tax on generation itself; the greater the head, the more electricity is generated and the more the licensee pays. The bench noted that the Himachal Pradesh High Court had reached the same conclusion in NHPC Ltd. v. State of H.P. on 5 March 2024, as had the Uttarakhand High Court in THDC India Ltd. v. State of Uttarakhand on 27 April 2026. The levy, it held, is a tax on the generation of electricity.

Tested against the Constitution as it stood in 2010

Competence, the court said, must be judged by the law prevailing when the statute was enacted, not when it is challenged. In 2010 the State of Jammu and Kashmir enjoyed special status under Article 370 as it then stood: its legislature had power over everything except the matters on which Parliament could legislate for the State, Entries 1 to 96 of the Union List applied to it, and the residuary Entry 97 did not, so residuary power lay with the State. The question was therefore whether taxing the generation of electricity fell within any entry that Parliament held at the time.

Entry 53 of the State List reaches only the consumption or sale of electricity; no State entry touches generation. The developers pointed to Entry 84 of the Union List as it stood before amendment, which covered duties of excise on tobacco and other goods manufactured or produced in India. Electricity, the court held, is goods: the Supreme Court said so in Commissioner of Sales Tax, M.P. v. M.P. Electricity Board, and the Constitution Bench in State of Andhra Pradesh v. National Thermal Power Corporation approved that view, correcting only the suggestion that electricity can be stored, and explained that its generation, transmission and consumption are almost instantaneous. In M.P. Cement Manufacturers’ Association v. State of Madhya Pradesh the Supreme Court held directly that Parliament has exclusive competence over a duty on the production of electricity, striking down a cess that fell on units produced whether for sale, supply or consumption. The court’s own Division Bench had followed those authorities in National Hydro-Electric Power Corporation v. State of J&K in 2005 to quash SRO 141 of 21 April 1999, which imposed electricity duty on generation. The 2010 Act, to the extent it taxes generation, was therefore beyond the competence of the former State and ultra vires the Constitution.

Water is neither land nor mineral, and has no taxing entry of its own

Although the first three answers made the fourth issue redundant, the bench dealt with the Union Territory’s fallback that water is part of land, taxable under Entry 49, or a mineral, taxable under Entry 50, for which it cited Anant Mills Co. v. State of Gujarat, Kendriya Nagrik Samiti, Kanpur v. Jal Sansthan, State of West Bengal v. Kesoram Industries and Ichchapur Industrial Co-operative Society v. Competent Authority, ONGC. The argument was beside the point once the levy was found to be a tax on generation, the court said, but it would fail anyway. The Constitution lists water separately in Entry 17, land in Entry 18 with its taxing counterpart in Entry 49, and minerals with a taxing entry in Entry 50; it provides no taxing entry for water at all. If water were meant to be taxed as land or mineral, Entry 17 would be redundant, which the framers cannot have intended. Entry 17 is a regulatory entry and supports regulatory laws only. The cases the Union Territory relied on involved taxes whose incidence was land or minerals, not water as a separate component. The result, the court said, is that the Act may validly impose water usage charges on users other than hydro generators, but a water tax is beyond the State’s competence.

The last line of defence, that adoption under Section 96 of the Jammu and Kashmir Reorganisation Act, 2019 had turned the 2010 Act into a parliamentary enactment carrying Parliament’s assent, drew the bench’s sharpest language: it was “an attempt in desperation to save the impugned legislation”. The Reorganisation Act saves some State laws, repeals others, extends central laws to the two Union Territories and adopts State enactments; it does not convert them into Acts of Parliament. To hold otherwise would make every subject reserved to the Union Territory under Section 32(1) a Union subject, an absurdity. And a law that was beyond competence when passed is void from inception. Citing Deep Chand v. State of U.P., the court said of such an enactment: “It is a stillborn legislation, which cannot be validated.” Krishna Chandra Gangopadhyaya v. Union of India showed the only cure: remove the defect and enact a valid law within competence.

Order

The writ petitions were allowed. The court held that the Jammu and Kashmir Water Resources (Regulation and Management) Act, 2010, to the extent it provides for levying water usage charges on hydro power projects, amounts to a tax on the generation of electricity that the State legislature had no competence to impose on the petitioners; declared the Act ultra vires the Constitution and struck it down to that extent; quashed the demand notices issued to the petitioners; and restrained the respondent State from imposing any tax on the generation of electricity under the garb of water usage charges or any other tax. The judgment, reserved on 2 September 2026, was pronounced on 29 October 2026 and is marked reportable.