State Legislature lacks competence to tax electricity generation; such levy is ultra vires the Constitution.

Various hydroelectric power corporations challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012".

The Act sought to levy a tax on the drawal of water for electricity generation.

Previously, a Division Bench of the Uttarakhand High Court delivered a split verdict on October 25, 2023: the then Chief Justice upheld the Act, while the companion judge struck it down as ultra vires.

Several appellants also contended that the State was promissorily estopped from levying this tax due to specific 'Implementation Agreements' (IA) and 'Restated Implementation Agreements' (RIA) which had guaranteed no such taxes or royalties would be imposed for the project duration.

The matter was referred to a third judge (Justice Alok Kumar Verma) to resolve the point of difference.

1. Whether the impugned tax is, in pith and substance, a tax on the "drawal of water" or a tax on the "generation of electricity".

2. Whether the State Legislature possesses the legislative competence under List II of the Seventh Schedule or Article 288 to enact the Act.

3. Whether Section 17 of the Act suffers from the vice of excessive delegation by granting unfettered power to the Executive to fix tax rates without legislative guidelines.

4. Whether the State is barred by the doctrine of Promissory Estoppel from levying the tax in view of existing contractual agreements with the power companies.

The Court applied the Primary Rule of Literal Interpretation, holding that the intention of the legislature must be found in the words used.

It relied on the "Doctrine of Pith and Substance" to determine the true character of the levy regardless of its nomenclature.

The Court followed the principle from State of W.B. vs. Kesoram Industries Ltd., which establishes that "Taxation" is a distinct matter from general subjects of legislation, and power to tax cannot be derived from a general entry.

Regarding delegation, the Court applied the rule that the legislature cannot abdicate "essential legislative functions," such as fixing tax rates without policy guidelines.

Upholding the principle that there is "no estoppel against the law" or against the legislature in the exercise of its legislative functions, as seen in M/s Hero Motocorp Ltd. vs. Union of India.

The Court scrutinized the Act's charging sections and definitions, noting that under Section 2(f) and 2(i), a "User" is only liable to pay tax if the drawal of water is specifically for "generation of electricity".

It determined that the taxable event is not the mere drawal of water but the generation itself, placing it outside the State's competence under List II.

The Court rejected the State's reliance on Entries 17, 45, 49, and 50 of List II, clarifying that water cannot be categorized as "land" or "mineral rights" for the purpose of this specific tax.

Regarding Article 288, the Court held it is not a source of legislative power but an enabling/exempting provision that does not grant independent taxing authority.

On the issue of delegation, the Court found Section 17 to be "naked delegation" because it allowed the Government to fix and vary rates without any upper limit or policy framework.

The Court rejected the plea of Promissory Estoppel, reasoning that an agreement between the Executive and a company cannot interdict the Legislative power to tax, and there can be no estoppel against a statute.

The Court also held that Section 17 of the Act is void due to excessive delegation.

The Court concurred with the then Chief Justice on the point of Promissory Estoppel, holding that the doctrine cannot be invoked against the exercise of legislative functions.

The reference was answered by striking down the Act as unconstitutional.