[This is a guest post by Rahul Pandey.]
Introduction
In the first unequivocal decision of its kind, the Himachal Pradesh High Court (“Himachal HC”) has struck down the The Himachal Pradesh Water Cess on Hydropower Generation Act, 2023, in NHPC Ltd v. State of HP (“NHPC”). While disputes pertaining to imposition of cess on usage of water for electricity generation are not unprecedented, this is the first instance that such a cess has been struck down in its entirety. A similar legislation was upheld by the Uttarakhand High court (“Uttarakhand HC”) in Alaknanda Hydro Power v. State of Uttarakhand (“Alaknanda”), and another is subject to a pending challenge before the Jammu and Kashmir High Court.
Despite being endowed with rich natural resources, these hill states often face a revenue crunch due to a lack of sources to generate income. They thus expect the imposition of cess on water usage for hydro-power generation fetched from their vast rivers to make up the shortfall However, the imposition of such a cess arguably comes at the cost of important constitutional principles relating to legislative competence, taxation and federalism being compromised. This is because the use of river water has ramifications beyond single states: it is utilized to produce renewable and clean energy for several neighboring states and territories. This article shall endeavor to highlight how the imposition of such a levy is invalid as rightly pointed out in NHPC and in the judgement of Maithani, J. in the split verdict arising out of a special appeal from Alaknanda in T.H.D.C. India Ltd. and Ors. v. State of Uttarakhand. (“THDC”).
The scope of this article shall be restricted to the issues of legislative competence and pith and substance. The article shall not engage with the issues of Article 288, promissory estoppel and the reading down of the tax as a fee.
Legislative Competence
In the present set of cases, the states relied upon Entry 17 (Water), Entry 45 (Land Revenue), Entry 49 (Taxes on land and buildings) and Entry 50 (Taxes on Mineral Rights) of List II to the 7th Schedule to justify the levy of the water cess. However, as per contentions presented by The Union of India, none of these are valid fields for the state legislatures to enact such legislation as the questioned act, in its true substance, is a tax on generation of electricity. This is exclusively a field for the parliament, as held by the SC in the case of M/s Hoechst Pharmaceuticals Ltd. & Ors. vs. State of Bihar & Ors. 1983 (4) SCC 45. (“Hoechst Pharmaceuticals”).
The power to tax cannot be interpreted as being ancillary to a regular entry and has to be derived clearly from a taxation entry. These are separate from general entries that are only regulatory in nature. The principle has been reiterated by the SC time and again in decisions such as Hoechst Pharmaceuticals, Bimolangshu Roy v. State of Assam, etc. This was also recognised by judgements of the Himachal and Uttarakhand High Courts in the decisions in NHPC and THDC respectively. However, in a glaring error, the single judge in Alaknanda, at various points in the judgement, referred to Entry 17 as a valid provision for the imposition of the said levy. (Paras 36, 75, 81). Based on previous SC decisions that make it clear that imposition of a tax cannot be inferred as being incidental or ancillary to regulation via another general entry, the states’ contention of the laws being competent via Entry 17 of the List II falls flat.
Placing reliance on the principles of constitutional interpretation, namely that each entry within the three lists must be given its widest possible amplitude, it was argued by the states that the Entries 45 and 49 of List II, dealing with land and land revenue, should be interpreted to include water within their meaning. Extensive reliance was placed upon the Constitutional Bench’s decision in W. B. vs. Kesoram Industries Ltd. & Ors., which declares that the word ‘land’ needs to interpreted in a wide manner as to include each and everything below and above it. These contentions were accepted by the Uttarakhand High Court in Alaknanda and by Vipin Sanghi, CJ, in THDC. However, as rightly pointed out by the judgement in NHPC, if the interpretation to the term ‘land’ has to be so wide as to include flowing rivers within it, then each and every object on earth would be directly and indirectly covered by the field of legislation provided by such an entry. (Para 50). Such an interpretation would run counter to the important principle expounded by the court in Calcutta Gas Co. (Proprietary) Ltd. v. State of W.B., that no entry should be interpreted in such a manner as to render another superfluous.
If the constitution really meant for land and water to mean one and the same, there would have been no need to introduce different entries, Entry 17 (Water) and Entry 18 (Land) for the purpose of their regulation as rightly pointed out by Maithani J in THDC (para 83). In fact, a whole list of entries that would lose their relevance if land was given a meaning as extensive as that demanded by the states, has been provided in NHPC. (para 50) Even if the state’s contentions of a river being an extended part of land is accepted, any tax levied on via Entry 45 shall be directly on the land as a unit, as per the judgement of the SC in India Cement Ltd. v. State of T.N.
However, it was the repeated submission of states that the tax is not on water itself but the drawing of water for hydro-power generation. If water is really an extension of land and such land in the form of water is liable to levies by the State Government, such a levy being on the drawing of it is neither a tax on the land via Entry 45 nor a form of Land Revenue via Entry 49; rather, it is a tax on its drawing which is an activity only incidental to “water”, based on principles as laid down in Sea Customs Act, S. 20 (2). (paras 26 and 94). The incidence of taxation is on the drawing of water for hydro-power generation and not on the land itself thus making the legislature incompetent to levy such tax via virtue of Entries 45 and 49 of List II.
For justifying the imposition of the tax via Entry 50 (mineral rights) of the List II, in all three cases, the judgement in Ichchapur Industrial Coop. Society Ltd. vs. Competent Authority, Oil & Natural Gas Commission (“Ichchapur”) was cited to argue that the Supreme Court has held water to be a mineral under Entry 50. This was accepted by the court in Alaknanda (para 41) and by Vipin Sanghi, CJ. in THDC (paras 58 and 62). However, as rightly pointed out in NHPC (para 57) and by Maithani, J. in THDC, water was read into minerals in the Ichchapur case only for the purpose of Petroleum & Minerals Pipelines (Acquisition of Right of User in Land) Act, 1962 (User Rights Acquisition Act), considering the definitions in The Mines Act, 1952. Such an interpretation cannot be applied while reading a constitutional field of legislation. No universal declaration has been made with regard to water being a mineral under the meaning of entry 50. Furthermore, even if water is considered a mineral for the purpose of Entry 50, the tax has to be on ‘mineral rights’ and not the mineral itself. Placing reliance on the decision in Hingir Rampur Coal Co. Ltd. V. State of Orissa, AIR 1961 SC 459, Maithani, J. in THDC has correctly pointed out the levy in question has nothing to with any mineral rights being conferred, thus making Entry 50 not a valid field for the enactment of such legislation. (para 100).
Pith and Substance
While the doctrine of plenery powers states that each and every entry must be given the widest possible meanings, it needs to exercised with a certain degree of caution in respect to entries in the three lists that concern taxation. Taxation Entries cannot be subject to the ordinary rules of interpretation for they are distinct vis-à-vis general entries. The same was reiterated by the court in the judgement of All India Federation of Tax Practitioners v. Union of India (para 527). In this regard, it is necessary for the courts to enquire into the ‘pith and substance’ with regard to the true nature of a particular levy with reference to the legislative competence.
As noted above, the states have contended that the tax is on the ‘drawing of water for electricity generation’ rather than the water of the electricity generation itself. However, a bare perusal of the text of the act would reveal that the tax is on the singular event of the drawing of water for the purpose of hydro-power generation. The generation of hydro-power is impossible without the drawing of the water for the purpose for it. Himachal Pradesh, via a notification dated 16.02.2023 and Uttarakhand, via notification dated 07.11.2015, have made the height at which the water falls from a measure for determining the quantum of the tax. Both NHPC (para 40) and Maithani, J. in THDC (para 176) have taken a note of the same. The height from which the water falls from is directly related to the amount of electricity generated and thus the tax in no way can be said to be concerned with the mere drawing of water as argued by the states. It is not the mere usage of water that is being taxed but the use of water for the purpose of hydro-power generation by a user that is the taxable event.
Based on the taxable event, user and measures for the said tax, it can clearly be concluded that the state legislatures have tried to cloak a levy on hydro-electricity generation as a levy on the mere drawing of water and thus being an exercise of colorable legislation, the tax, in its present form and shape, needs to be struck down.
Conclusion
It is submitted that the states of Himachal Pradesh and Uttarakhand clearly lack the legislative competence to enact such a tax on use of water for hydro-power generation. The enactment of such a levy is clearly in contravention to the scheme under Schedule VII of the Constitution. When the issue comes up to the SC, this article comments the approach of they must take note of the judgements of NHPC and Maithani, J. in THDC for the Court’s consideration.
#Constitutionality #StateEnacted #Water #Cess #Constitutional #Law #Philosophy