Sanchayita Lahkar

The High Court of Karnataka Single Bench of Justice Anant Ramanath Hegde held that the State legislature lacked the constitutional competence to impose a tax on electricity charges under the amended Section 3(1) of the Karnataka Electricity (Taxation on Consumption) Act, 1959. The Court declared the impugned provisions unconstitutional to the extent they levied tax on “minimum tariff” for electricity supplied but not consumed. It further directed the State to refund taxes collected under the now-invalidated provisions to the extent admissible and permitted aggrieved petitioners to initiate appropriate restitution proceedings as per law.

The writ petitions were instituted by multiple industrial units and the Federation of Karnataka Chambers of Commerce and Industry. The petitioners challenged the constitutional validity of the amendments introduced to Section 3(1) of the Karnataka Electricity (Taxation on Consumption) Act, 1959, by Act No.7 of 2003 and Act No.5 of 2004. These amendments altered the tax base from “consumption of electricity” to “electricity charges,” thereby including “minimum tariff” imposed on the mere supply of electricity, regardless of its consumption.

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The petitioners contended that electricity was taxed even when no consumption occurred, solely based on minimum tariffs agreed upon for continuous supply. They maintained that the State was empowered to tax only upon consumption or sale of electricity under Entry 53 of List II of the Seventh Schedule to the Constitution of India. Thus, the legislative imposition on electricity charges, they argued, exceeded constitutional limits.

To substantiate their position, the petitioners relied on judgments such as Southern Petrochemical Industries Co. Ltd. v. Electricity Inspector and ETIO, State of Mysore v. West Coast Paper Mills Ltd., and M.P. Cement Manufacturers Association v. State of M.P., which delineated the boundaries of taxation in the electricity sector. They argued that taxing supply without actual consumption conflicted with constitutional provisions and established jurisprudence.

On the other hand, the State argued that the petitions had become infructuous due to the subsequent amendment brought in by Act No.24 of 2018, which reverted the tax base to only "sale and consumption of electricity." It maintained that this legislative change rendered the challenge academic. Further, it argued that the State had the authority to impose the tax and that the tax collected was constitutionally valid at the time of its collection.

The Court examined both issues: whether the amended provisions were ultra vires and whether the petitions remained maintainable despite legislative amendments enacted during their pendency. It determined that since the petitioners sought consequential reliefs, including tax refund, the petitions were not infructuous and required adjudication on merits.

Regarding restitution, the petitioners in Writ Petition No.3935/2008 had not specifically pleaded that the tax burden had not been passed on to consumers, nor did they seek refund from the State. However, Writ Petition No.1644/2009, filed by a non-manufacturing consumer, stood on a different footing. The Court noted that the petitioner in the latter case could not have passed the tax burden and was therefore entitled to refund.

The Court recorded that: “The nomenclature of the Act is ‘THE KARNATAKA ELECTRICITY (TAXATION ON CONSUMPTION) ACT, 1959’… Under the Constitution of India, there are two distinct legislative fields covering electricity—Entry No.53 in List II and Entry No.38 in List III of the Seventh Schedule.”

It observed that: “Entry No.53 of List II provides for a taxation entry; whereas Entry 38 of List III provides for a non-taxation entry dealing with general aspects of electricity, excluding taxation… State’s legislative power to impose tax on electricity is traceable only under Entry No.53 in List II and such power is confined only on consumption and sale of electricity.”

On the nature of electricity supply and consumption, the Court stated: “If the licensee supplies electricity to a consumer and demands a certain Tariff as a minimum Tariff payable, irrespective of consumption, then such Tariff cannot be termed as a Tariff on consumption or a tariff on sale.”

Referring to Section 4 of the Sale of Goods Act, 1930, the Court recorded: “Where the goods are transferred from the seller to the buyer, the contract is called a sale, but where the transfer of the property in the goods is to take place at a future time… the contract is called an agreement to sell.”

Thus, in the Court’s view: “Only when the electricity is consumed it is sold. Till then, it is only a supply. If the supply of electricity to a consumer is charged, then it is a Tariff on supply, not on sale.”

The Court further recorded: “Looking at the language used in Entry No.53 of List-II… the State has no legislative competence under Entry No.53… to levy tax on minimum tariff.”

Regarding relief, the Court stated: “Petitioners in Writ Petition No.3935/2008 shall not claim a refund of tax paid before 07.03.2008… Federation in Writ Petition No.1644/2009 is entitled to refund from 15.01.2009 till 18.07.2018.”

The Court issued the following directions as part of its final order: Writ Petition No.3935/2008 was allowed in part, while Writ Petition No.1644/2009 was fully allowed. Section 3(1) of the Karnataka Electricity (Taxation on Consumption) Act, 1959, as amended by Act No.7 of 2003 and Act No.5 of 2004, was declared unconstitutional. The Court found that the imposition of tax on electricity charges, including the minimum tariff for unconsumed electricity, lacked legislative backing under Entry 53 of List II.

It was ordered that the State (Respondent No.1) shall reimburse the tax collected from the petitioner in Writ Petition No.1644/2009 from January 15, 2009, to July 18, 2018—the date of statutory amendment.

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The petitioners in Writ Petition No.3935/2008 were granted liberty to initiate appropriate legal proceedings to recover tax paid between March 7, 2008 (the date of filing the petition) and July 18, 2018, subject to proof that the tax burden was not passed on to consumers, in accordance with the principles laid down in Mafatlal Industries Ltd. & Ors v. Union of India & Ors, (1997) 5 SCC 536.

The Court clarified that only the tax on the "minimum tariff" had been held unconstitutional and not the tax imposed on actual consumption of electricity.

Advocates Representing the Parties

For the Petitioners: Sri M. S. Raghavendra Prasad, Advocate

For the Respondents: Sri Rajkumar M, Additional Government Advocate; Sri H. V. Devaraju, Advocate

Case Title: M/s Sona Synthetics & Ors v. State of Karnataka & Ors
Case Number: Writ Petition No.3935/2008 c/w Writ Petition No.1644/2009
Bench: Justice Anant Ramanath Hegde