Abstract
This article examines the recent legal conflicts between Indian state governments and hydro-power projects, focusing on the application of the doctrine of promissory estoppel. Despite India’s commitment to renewable energy, some states have imposed new taxes on hydro-power projects, conflicting with previous agreements and threatening investor confidence. The article underscores the importance of the doctrine of promissory estoppel in ensuring states honor their commitments, which is crucial for fostering investment and achieving India’s renewable energy goals.
Introduction
The Hon’ble Supreme Court in the case of M.K. Ranjitsinh & Ors. v. Union of India & Ors. [Order dt. 21.03.2024 in W.P.(C)838 of 2019] noted India’s necessity to enact a shift towards renewable energy resources to mitigate the impacts of climate change and achieve the goals of sustainable development. It is well-established that Indian citizens possess the fundamental right to a clean and healthy environment. However, the Hon’ble Apex Court has proceeded to hold that the right to safeguard against adverse impacts of climate change for the Indian citizens also emanates from the fundamental rights recognized under Articles 14 and 21 of the Constitution of India.
Government Policies and Incentives
A major component of facilitating access to a clean environment is through reliance on clean and green energy sources such as solar power, hydropower, and wind power projects. The implementation of Electricity (Promoting Renewable Energy Through Green Energy Open Access) Rules, 2022 on 06.06.2022, also reiterates the Central Government’s commitment to meet the rising demand for electricity by generating 500GW of energy from non-fossil energy sources by 2030.
Hydropower projects form a crucial component in achieving the goal envisioned by the government as these projects not only provide electricity generation but also provide a number of ancillary services required to maintain system stability and supply security. The significance of the hydro-power projects is evident from the budgetary reforms and governmental policies whereby the government has offered substantial budgetary support towards establishing the infrastructure and also granted a waiver of Inter-State transmission charges on the transmission of power from new hydropower projects. The central government has also initiated a reworking of the national hydropower policy to provide better incentives and promote the establishment of new hydropower projects. The recently implemented Guidelines on Pumped Storage Projects also reinforce the Government’s commitment by lending budgetary support and providing resources such as government land at concessional rates to establish the projects.
The essential incentives of budgetary support for establishing enabling infrastructure such as roads and bridges, along with exemptions and concessions, play a key factor in incentivizing the private players to equally contribute along with the PSUs to the development of green energy growth in the country. Several such projects are invested and established upon execution of agreements with the State Governments wherein terms of royalty payments, waivers, exemptions, supply of free power, etc., are incorporated, and it is such representations that instil the investors and entrepreneurs with the confidence and trust to initiate investments for mutual benefits of the concerned parties.
However, there has been a recent trend of State Governments attempting to wriggle out of their contractual obligations by introducing legislative and administrative measures that alter the status quo against investors.
It led to the Central Government issuing a course-correction measure via the issuance of Circular dt. 25.10.2023 to all the States. The said Circular clarified that the States do not have constitutional competence to levy any tax/duty on generation of electricity and advised the States to ‘promptly remove any kind of tax/duty/cess levied in the guise of development fee/charges/fund on generation of electricity from any sources – including Thermal/Hydro/Renewables.’
Coincidentally, the same day as issuance of the aforesaid Circular, the Division Bench of the Hon’ble High Court of Uttarakhand delivered a split verdict in the case of T.H.D.C. India Ltd. v. State of Uttarakhand [Special Appeal No. 149 of 2021 dated 25.10.2023] on the constitutional validity of the Uttarakhand Water Tax on Electricity Generation Act, 2012 [‘Uttarakhand Act’].
The case of THDC India Ltd. (supra) had arisen as a challenge to the judgment dt. 12.02.2021 pronounced by the single-judge bench in the case of Alaknanda Hydro Power Co. Ltd. v. State of Uttarakhand & Ors. [2021 SCC OnLine Utt 189] wherein the Single-Judge had dismissed the writ petitions filed by the Petitioners and proceeded to uphold the constitutional validity of the Uttarakhand Act.
In the appeal before the Division Bench, it was the contention of the State that the Uttarakhand Act levied a tax upon the act of ‘drawal of water for electricity generation’ only. However, the Appellants, who were the power-generating companies and party to the power-sharing agreements with the State Government, contended that this was an attempt to levy a tax upon the act of ‘generation of electricity’ and in contravention of the contractual obligations of the State which were owed to the companies as a term of reciprocity for enjoying the share of renewable power provided by the companies to the State for free. Under the agreement, the State Government had provided assurances that no tax, duty, levy, or charge would be imposed on the electricity being generated by the companies. The said companies would also not be liable to make any payment for the usage of water as the State Government refrained from enforcing any charge for use of water at any time by the said companies for generation of electricity.
The cases of Alaknanda Hydro Power Co. Ltd (supra) and THDC India Ltd. (supra) discuss various aspects such as the constitutional competence of the States to levy tax on the act of drawl of water for generation of electricity, however, the scope of the present article is restricted to the issue of promissory estoppel.
Doctrine of Promissory Estoppel
Promissory estoppel is a principle rooted in equity and fairness, which prevents a party from going back on a promise that another party has relied upon to their detriment. The doctrine mandates that when one party makes a promise to another, and the latter relies on this promise, altering their position significantly based on the assurance provided, the promisor is legally barred from reneging on their word if doing so would result in injustice to the promisee.
The Single-Judge bench of Alaknanda Hydro Power Co. Ltd (supra) had held that the doctrine of estoppel cannot be enforced against any governmental activity pertaining to the exercise of legislative, sovereign or executive power. The rationale provided by the Ld. Judge was premised on the fact that the Legislature comprises people’s representatives who are dutybound to act in the public interest only. Thus, the Ld. Judge concluded that the Legislature cannot be proscribed from exercising its legislative function by private parties resorting to the doctrine of estoppel as the Government owes a duty to the public to act in a particular manner, and the doctrine of estoppel cannot be invoked for preventing the Government from acting in discharge of its duty under the law. The Ld. Judge had further observed that the doctrine of estoppel could not be applied in teeth of an obligation or liability imposed by law, particularly when there is the total absence of the power of exemption from tax.
The appellants in THDC India Ltd. (supra) contended that the projects by the companies had been established under the terms of the agreement executed between the companies and the State of Uttarakhand. It was agreed that 12% of electricity generated by the companies would be supplied free of cost to the State, and the State promised exemption from imposition of taxes, charges, and any levies for the act of electricity generation and usage of water. Thus, the doctrine of promissory estoppel mandated that the State was estopped from levying any tax upon the appellants as the same was in contravention of the agreements and the assurance provided by the State that no charges or tax would be levied against the power-generating companies.
In Indian jurisprudence, an independent cause of action can arise on the basis of the doctrine of promissory estoppel. The foundation of the doctrine is on principles of equity. The doctrine postulates that any act by one party to resign from its earlier position on a subject-matter whereby it had conveyed an assumption which may be of fact or law, present or future, cannot be allowed. The doctrine attempts to secure the rights of the other party which had proceeded to act on the basis of the said assumption conveyed to it through some course of conduct, act or omission (Manuelsons Hotels Pvt. Ltd. v. State of Kerala & Ors. [2016] 6 SCC 766).
The Hon’ble Supreme Court in Union of India & Ors. v. M/s Indo-Afghan Agencies Ltd. had held that the Government is not exempt from equity. The Court held in favor of the individuals who acted by relying upon the representations made by the Government.
It was further reiterated in M/s Motilal Padampat Sugar Mills Co. Ltd. v. State of U.P. & Ors. [1979] 2 SCC 409, wherein the Hon’ble Supreme Court held that the Government could not lay any claim of immunity from the doctrine of promissory estoppel to repudiate a promise under the pretense of facilitating its future executive action. If the Government did not want any hindrances or impediments to its executive action, then the Government ought not to make a promise, especially when it is aware that such promise would be acted upon by the promisee and the promisee would carry out its future plans after relying upon it. Although an exception was carved out in order to secure the public interest, the Government must establish the rationale and justification for a change in the policy in order to decide whether the public interest was hampered by binding the Government to perform its promise.
Justice Ravindra Maithani in THDC India Ltd. (supra) held that the tax demand raised by the executive was barred by the doctrine of promissory estoppel. Whereas Chief Justice Vipin Sanghi took a divergent view and held that the doctrine cannot operate against the law and the legislative power of the State as it would result in the imposition of restraints upon the State. Justice Sanghi noted that the agreements were between the Appellants and the State Government, i.e., the executive limb, and not with the State Legislature. Thus, the issuance of the notification to fix the rates for water tax was only a piece of delegated legislation, and hence, there can be no estoppel against the same. Although it is well-established that there lies no estoppel against the law, however, the terms of the agreement necessitated a grant of exemption to the hydropower projects established pursuant to the agreements. The Legislature, in implementing the Uttarakhand Act, did not operate in a vacuum. The Legislature and its representatives and the government functionaries operate in tandem. Hence, it cannot be presumed that the legislative members were completely unaware of their responsibilities and obligations under the agreements entered with the power-generating companies. It was despite this express knowledge that the Uttarakhand Act was enacted, and consequent notifications were issued by the Executive with an express intention to extort revenue while hurting the same parties that were aiding in harnessing the hydro-power potential of the State. The public interest of the state demands socio-ecological development in order to provide employment and development for its citizens. It can be evinced that the State had failed to establish any public interest justifying its action of violating the terms and conditions of the agreement.
The Hon’ble Supreme Court in S.V.A. Steel Re-Rolling Mills Ltd. v. State of Kerala & Ors. [2014] 4 SCC 186 had held that any digression by the State from its assurances would not only violate the doctrine of promissory estoppel, but it would also be an unfair and immoral act by the State not to execute the agreed terms and act as per its promise. In Motilal Padampat (supra), the Apex Court had held that in a republic governed by the rule of law, no one, howsoever high or low, is above the law, and thus, an exception cannot be made for the Government. The courts and the legislature must constantly endeavor to ‘close the gap between law and morality and bring about as near an approximation between the two as possible and bring about as near an approximation between the two as possible’. It is only then that law can acquire legitimacy and gain social acceptance. The doctrine of promissory estoppel significantly contributes towards that direction.
The Hon’ble Supreme Court, in the case of S.V.A. Steel Re-Rolling Mills Ltd. (supra) had observed the necessity of the doctrine from the eyes of an entrepreneur. The Apex Court had noted that the entrepreneur considers several factors, such as place of business, capacity of production, incentives and assurances offered by the State, etc., before setting up an industry, as any failure in the estimates or consideration of relevant factors would lead to chances of failure of business and complete ruin. Thus, the circumstances in which the industries are set up should be invariably considered while adjudicating the subject-matter as it is on the assumption and existence of such facts as in a present and future state of affairs that the parties intend to secure via agreements and perform its reciprocal obligations.
India’s sustainability targets align with the United Nations Sustainable Development Goals (SDGs), with a focus on sectors like smart cities, affordable housing, renewable energy, and electric mobility. The national FDI facilitation agency, Invest India, is committed to aligning investor facilitation goals with UNSDGs and provides comprehensive information to target investors.
Any deviation from the assurances provided by the State severely damages the investor sentiment and confidence in the industry. The Hon’ble High Court of Andhra Pradesh in the case of Ecoren Energy India Pvt. Ltd. v. State of Andhra Pradesh 2022 SCC OnLine AP 601 had considered that the contractual agreements are sacrosanct and any revision of power purchase agreements with the power distribution companies would shake the confidence of investors in the sector which would resultantly lead to an adverse impact on the future tenders and bidding process.
Moreover, the implementation of such taxes leads to an increased burden on the consumers and the States that purchase electricity from other States, thereby defeating the aim to provide an affordable energy resource. The Legislative Assembly of Punjab had passed a unanimous resolution condemning the Himachal Pradesh Water Cess on Hydropower Electricity Generation Act, 2023 [‘Cess Act’] as several hydro-power projects made with investments from Punjab were located within the territorial jurisdiction of Himachal Pradesh and subject to the levy of the cess under the Act. The Statement of Objects and Reasons of the Cess Act had also specifically stated that the Act was necessitated in order to raise revenue from the limited natural resources of the State. However, the State failed to consider the overall loss of agricultural, employment, infrastructural, economic, and environmental benefits by exacting an unexpected financial burden upon operational hydro-power projects, which may result in deterring future investments in the State.
Fortunately, the Hon’ble Himachal Pradesh High Court in NHPC Ltd v. State of H.P. & Ors. 2024 SCC OnLine HP 533 held that the provisions of the Cess Act were not within the legislative competence of the State Government and thus, they were ultra vires the Constitution.
The argument that the levy of tax was necessitated to aid an increase in the revenue for the State has to be tested on the anvil of constitutionality and viability. Several governmental initiatives are aimed at encouraging investments in the region in order to provide its people with opportunities of livelihood and development. A reliance on taxation methodology as a one-glove-fits-all strategy to raise revenue, especially in contravention of the State’s contractual obligations, appears as a typical bait-and-switch strategy which scares away further investment and entrepreneurs from the State.
Conclusion
Given the threat of climate change, it is imperative that the Central and State Governments implement concerted efforts to achieve the targeted goals of establishment and enhancement of the generation and storage capacity of renewable energy.
Section 61(h) of the Electricity Act of 2003 provided the States with the discretion to implement tariffs pursuant to their energy policies. The said provision stipulated that the terms for determining the tariff by the State shall be guided by “the promotion of co-generation and generation of electricity from renewable sources of energy”. The enforcement of levies upon the hydro-power projects in a stark and blatant departure from the agreements entered by the States adversely impacts the future investments and growth of renewable energy resources. This will result in stunting the growth of the renewable energy sector by lending uncertainty over the State’s policy measures. The sudden change in law by implementing legislative measures to extract additional revenues from the power projects hangs a Damocles Sword upon the investors and operators of such projects who may remain under a constant terror of imposition of taxes being handed to them, resulting in a significant financial burden to be borne by the companies. Such fear and uncertainty nullify the effect of budgetary aid and policy incentives implemented to boost the renewable energy sector.
Authors:
Malak Bhatt, Founding Partner, NM Law Chambers
Samridhi, Associate, NM Law Chambers
Ananya Kanoria, Associate, NM Law Chambers.
Disclaimer:
The views in this article are strictly personal and based on an analysis of the current legal position. The article is only meant for educational purposes and is not meant to be used an authority for any statement made therein
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