State Legislature lacks competence to tax electricity generation; "Water Tax" on drawal for power is ultra vires.

Various hydroelectric power corporations challenged the constitutional validity of "The Uttarakhand Water Tax on Electricity Generation Act, 2012," which imposed a "water tax" on users drawing water for power generation

Appellants argued they had entered into Implementation Agreements with the State, which promised exemptions from such taxes

A Division Bench of the Uttarakhand High Court delivered a split verdict in 2023: the Chief Justice upheld the Act, while Justice Maithani struck it down as ultra vires

The matter was referred to a third judge (Justice Alok Kumar Verma) to resolve the tie

1. Whether the State Legislature has the competence under List II to impose a tax on water used specifically for electricity generation

2. Whether Section 17 of the Act suffers from the vice of excessive delegation by allowing the Government to fix tax rates without legislative guidelines

3. Whether the State is barred by the doctrine of promissory estoppel from levying the tax due to prior contractual agreements

The Court applied Article 246 read with the Seventh Schedule of the Constitution, emphasizing that taxing entries are distinct from general regulatory entries (M.P.V. Sundararamier & Co. v. State of A.P.)

It relied on the "Doctrine of Pith and Substance" to determine that the true nature of a tax depends on its taxable event, not its nomenclature (State of W.B. v. Kesoram Industries Ltd.)

Regarding delegation, it applied the principle that fixing tax rates without a policy framework or "ceiling" constitutes abdication of "essential legislative functions"

Concerning promissory estoppel, the Court followed M/s Hero Motocorp Ltd. v. Union of India, which establishes that estoppel cannot be pleaded against the legislature’s exercise of its legislative or taxing powers

The Court analyzed the "charging section" (Section 17) and definitions (Section 2) to conclude that the taxable event was not the mere drawal of water, but the drawal specifically for electricity generation

Consequently, in pith and substance, the levy was a tax on electricity generation, which falls outside the State's competence under List II

Regarding delegation, the Court found that Section 17 conferred "naked" and "unfettered" power upon the Executive to fix and vary rates without any legislative cap or policy guidance, thus violating the rule against excessive delegation

On the point of promissory estoppel, while acknowledging the prior agreements promising tax exemptions, the Court held that a State Government’s contractual promise cannot bind the State Legislature’s sovereign power to enact laws, nor can there be estoppel against a statute

The reference was answered by striking down the Act

The Court rejected the plea of promissory estoppel, holding that the State's taxing power cannot be interdicted by prior executive agreements