2024 (3) TMI 585 - HC - Indian Laws

Legislative competence, the constitutional validity and the vires of the Himachal Pradesh Water Cess on Hydropower Generation Act, 2023 - Case of State is that Since water is a State s subject matter and comes under entry 17 of List-II, therefore, the State has legislative competence to make law and hence there is no violation of article 265 of the Constitution of India. Nature and event of taxation under the impugned Act - HELD THAT - The power to tax is on generation of electricity and user of water is only incidental. The user of water is not being taxed and it is only the user of water for generation of electricity , who is being taxed. Therefore, it is a tax on generation of electricity. If it was the quantum of water used, then the height from which the water would fall as a measure to determine the rate of cess would be wholly irrelevant. It is evidently clear from the aforesaid notification dated 16.02.2023 that the quantification is not based on the use of water, but is based on the height from which the water falls. The use of water in fact does not go by the text of the impugned Act. It is generation of electricity that is the bone and water drawn is only the flesh . The taxable event is hydropower generation and not the usage of water because if there is no generation, then there is no tax . Moreover, if the cess was on usage of water , then how could the height, at which the water falls on the turbine, be made the taxable event? It is settled principle of law that standard adopted as a measure of levy, although not determinative, is at least indicative of the nature of the tax. Weighed alongwith and in the light of other relevant circumstances, the method adopted by the legislature would be relevant in determining the character of the impost. The impugned levy varies in quantum with the quantum of electricity generated but not the quantum of water drawn and, thus, makes it clear that its character or nature is such that it is inextricable with electricity generation. Thus, there are no hesitation to answer the point in favour of the petitioners by concluding that by the impugned Act cess is sought to be imposed on generation of electricity as against water and, therefore, it is a misnomer that tax is levied on water and not generation of electricity , and is, therefore, not a water tax - answered in favour of petitioners. Pith and substance of the taxing legislation which assumes significance not to the question of bonafides or malafides but in examining the competence of the legislature - HELD THAT - In determining whether an enactment is a legislation with respect to the given power, what is relevant is whether in its pith and substance , it is law upon the subject matter in question. Therefore, it is necessary here to subject the impugned Act to the test of pith and substance to ascertain its true intent and character, which is relevant in determining as to which list it would fall under and also to trace the State's competence to have promulgated the impugned Act arises. As per Article 265, no tax can be levied or collected except by authority of law. Competence of the State to promulgate the impugned Act whether can be traced to Entry 49 of List-II to the Seventh Schedule of the Constitution as contended by the State - HELD THAT - It is well settled that while the widest amplitude should be given to the language used in one entry, every attempt has to be made to harmonise its contents with those of other entries, so that the latter may not be rendered nugatory. Competence to promulgate the impugned Act whether can be traced to Entry 50 of List-II as contended by the State - HELD THAT - The State's competence to impose impugned levy cannot be traced to Entry 50 of List-II as contended by it. Activity of non-consumptive drawl of water for generation of hydropower, where the water drawn is allowed to flow back to its source, being a single inextricable event cannot be brought under the purview of taxing mineral rights - even Entry 50 of List-II cannot be held to countenance the States taxation on water drawl for generation of electricity. Competence to promulgate whether can be traced to Entry 45 of List-II - HELD THAT - The State's competence to promulgate the impugned Act cannot be traced to Entry 49 of List-II. Therefore, Rekchand's case 1997 (5) TMI 441 - SUPREME COURT is not applicable in the present case and the State's competence cannot be traced to Entry 45 of List-II - in Rekchand case, the levy was imposed on drawl of flowing water by artificial contrivance for industrial purpose. The rates of such levy were specified under Resolution. It was on account of the definition of land under the Transfer of Property Act, 1882, which included right to water flowing therefrom, the said levy was sustained by the Hon'ble Supreme Court under Entry 45, List-II. Competence to promulgate whether can be traced to Entries 17 18 read with 66 of List-II as a tax - HELD THAT - The State has relied on Entries 17 18 of List-II to demonstrate its competence to have legislated the Impugned Act. In this regard, it is a settled principle of law that taxation entries are distinct from general regulatory entries. Entries 1 to 44 in List-II are regulatory, whereas Entries 45 to 63 are taxing entries. Therefore, the legislative competence to impose any tax on water drawn for hydropower generation cannot be imposed by the State by referring to Entries 17 18 of List-II being regulatory entry - 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 inter-State supply of electricity for which again the State is not competent to do so. Competence to promulgate whether can be traced to Entries 17, 18 read with 66 of List II as a fee - HELD THAT - Once it is held that the cess sought to be imposed by the impugned Act is not on the water drawn but on the generation of electricity , then, it is the Central Government alone which could levy tax on generation electricity - Noticing that electricity is goods - the Hon ble Supreme Court CST vs. M.P. Electricity Board 1968 (11) TMI 85 - SUPREME COURT observed that levy of State duty on production of electricity is covered with the phrase other goods manufactured in Entry 84 of List I and this is within the exclusive jurisdiction of the Parliament. Consequently, it was declared that the State has competence to levy tax only on the sale and consumption of electricity - the Hon ble Supreme Court held that the levy on generation of electricity is not within the legislative competence of the State - Point answered in favor of petitioner. Without prejudice, the impugned Act is unconstitutional for it suffers from vice of excessive delegation - HELD THAT - In the instant case, three essential components can be clearly identified within the impugned statute, which are taxable events, the person liable to pay tax and the rate of tax . However, the impugned legislation fails to identify the fourth and equally critical component i.e. measure of tax, which is the value on which the rate of tax will be applied for computing the tax liability - In exercise of powers vested under Section 15(2) of the impugned Act that the State Government issued a Notification dated 26.08.2023, whereby the tariff structure on water cess was fixed on the basis of Head . However, even the said notification failed to prescribe the measure of tax and instead proceeded to prescribe tariff rate without any indication or measure on which such tariff rate will be applied. Moreover, measure of tax being vague, based upon the assessment or water drawn, which would form the basis of the tax imposed is also vague and fraught with lack of adequate guidelines, as is evident from the combined reading of Section 12 with Section 17 of the impugned Legislation. The preamble of the impugned Act merely states that it is an act to levy water cess on hydropower generation in the State of Himachal Pradesh, the Statement of Objects and reasons merely states that the objective of the impugned Act is revenue generation. Therefore, on account of having delegated power to fix rates of impugned levy to Government of Himachal Pradesh without any legislative policy or guidance, the impugned Act is unconstitutional - point is accordingly answered in favour of the petitioners. Promissory Estoppel - HELD THAT - The question of promissory estoppel has been rendered academic and, therefore, need not be answered. To conclude, it was held as follows (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. The petition is allowed.

Summary

Issues Involved:
1. Nature and event of taxation under the impugned Act.
2. Competence of the State Legislature to enact the impugned Act.
3. Constitutionality of the Act concerning excessive delegation.
4. Applicability of the principle of promissory estoppel.

Summary:

Issue 1: Nature and Event of Taxation Under the Impugned Act
The court examined whether the tax imposed by the Himachal Pradesh Water Cess on Hydropower Generation Act, 2023, was on water or on the generation of electricity. The court concluded that the levy was imposed on the generation of electricity and not on the mere drawl of water. The taxable event was identified as "hydropower generation," and the measure of the levy was based on the height from which water falls, indicating that the tax was essentially on electricity generation.

Issue 2: Competence of the State Legislature to Enact the Impugned Act
The court analyzed the competence of the State Legislature under various entries of List-II of the Seventh Schedule of the Constitution. It concluded that:
- The competence could not be traced to Entry 49 (Taxes on lands and buildings) as the levy was on the generation of electricity and not directly on land or buildings.
- Entry 50 (Taxes on mineral rights) was also not applicable as the activity of non-consumptive drawl of water for hydropower generation could not be classified under mineral rights.
- Entries 17 and 18 (Water and Land) were regulatory and did not confer taxing powers.
- Entry 66 (Fees) could not be invoked as the levy was not a fee but a tax.

The court held that the impugned Act was beyond the legislative competence of the State Legislature as it imposed a tax on the generation of electricity, which falls under the exclusive domain of the Union Government.

Issue 3: Constitutionality of the Act Concerning Excessive Delegation
The court found that the Act suffered from the vice of excessive delegation as it failed to provide any guidance or legislative policy for the fixation of rates, leaving it entirely to the executive. The Act also lacked a clear measure of tax, making it unconstitutional. The court emphasized that the essential components of a taxing statute, such as the taxable event, the person liable, the rate of tax, and the measure of value, were not adequately defined.

Issue 4: Applicability of the Principle of Promissory Estoppel
Given the conclusions on the other issues, the question of promissory estoppel was rendered academic and was not addressed.

Conclusion:
The court declared the Himachal Pradesh Water Cess on Hydropower Generation Act, 2023, and the corresponding Rules to be ultra vires the Constitution. The provisions were quashed, and any amounts recovered under the Act were ordered to be refunded. Notices issued under the Act were also declared illegal and set aside.