SC hands Adani Power a major victory: Why govt cannot tax SEZ electricity as a ‘foreign import’

The Supreme Court, in a tax dispute involving Adani Power Limited, on January 5, held that the Union government had no authority to levy customs duty on electricity supplied from a Special Economic Zone to the domestic market. It overturned the 2019 order of the Gujarat HC.

The company was represented in court by senior advocate P Chidambaram.

The SC directed a full refund of duties collected from the company over five years and made it clear that the executive cannot keep a tax alive by changing its rate or packaging once its legal foundation has been struck down.

The bench comprising Justices Aravind Kumar and NV Anjaria said that the levy was “without authority of law” and that judicial decisions are not “advisory opinions” that the State may choose to sidestep. The implication is that once a tax is declared illegal, the government cannot resurrect it through fresh notifications resting on the same legal footing.

The case arose from electricity generated by Adani Power’s thermal plant inside the Mundra SEZ in Gujarat and supplied to distribution companies in the Domestic Tariff Area (DTA). Under the SEZ framework, they are treated as being outside India’s customs territory for limited fiscal purposes, and the DTA covers the rest of the country.

The issue pertained to whether electricity wheeled from an SEZ to the DTA could attract customs duty. Electricity imported from foreign countries carried a nil rate of duty. Yet through a series of customs notifications beginning in 2010, the centre sought to levy duty on electricity cleared from SEZs into the domestic market. What made it stand out was that the levy was applied retrospectively, creating a large and unexpected tax demand for electricity that had already been sold.

Adani Power challenged this before the Gujarat HC in 2010. In a 2015 judgment, a coordinate bench held that customs duty can only be charged when goods are actually imported into India. Electricity moving from one part of India to another, even if one part is an SEZ, does not cross the foreign border. The court said that a provision that is meant to waive taxes cannot be used to invent a new one.

Despite this, instead of dropping the levy, the government replaced the percentage-based tax with a small per-unit charge. Though the amount went down, the duty itself continued. This prompted a second round of litigation that culminated in the 2019 HC judgment denying further relief.

The contest turned on how three legal provisions interact. Section 12 of the Customs Act 1962 states that customs duty may be levied only on goods “imported into, not exported from India.” The charging event here is the act of import itself.

Section 30 of the SEZ Act 2005 provides that goods removed from an SEZ into the DTA shall be chargeable to customs duty “as if such goods had been imported into India”. The government relied on this deeming clause to argue that electricity supplied from an SEZ must be treated as an import.

The Central Government is empowered to issue exempt notifications, fully or partially, exempting goods from customs duty “in the public interest” under Section 25 of the Customs Act.

The case of Adani was that Section 30 does not create a new taxing power. It merely aligns SEZ clearances with foreign imports for rate parity. Since imported electricity attracted a nil rate of duty, SEZ electricity could not be taxed without violating that parity. The company also argued that Section 25 permits exemptions, not the creation of a fresh levy through subordinate legislation.

The government, on the other hand, treated SEZ-to-DTA supply as a deemed import and used exemption notifications to prescribe a positive rate of duty, even when the base rate on imported electricity was nil.

In its 2019 ruling, the Gujarat HC dismissed Adani Power’s petition. It reasoned that the earlier relief was consciously limited in time and could not be extended automatically. It also flagged the risk of a “double benefit”, noting that Rule 47(3) of the SEZ Rules, requiring duty to be paid back on raw materials like coal when power is sold to the DTA, had been kept in abeyance. Exempting both inputs and outputs, the court said, would tilt the balance unfairly.

The HC further underscored that Adani Power had not directly challenged the validity of the later notifications, and that exemptions granted to electricity imported from Nepal and Bhutan were country-specific, not general.

Allowing the appeal, the SC overturned the Gujarat HC’s 2019 judgment and held that the levy of customs duty on electricity supplied from an SEZ to the DTA was without authority of law. It struck down the levy imposed through the notifications and directed the government to refund all duties collected from Adani Power between September 2010 and February 2016, within 8 weeks. The refund, the court clarified, would carry no interest, and no further demands could be enforced.

More significantly, the court recast the legal framework underpinning the dispute. It held that electricity supplied from an SEZ to the DTA is an internal supply, not an import. While an SEZ is “fiscally distinct”, it is not foreign territory. The “as if imported” formulation in Section 30 of the SEZ Act, the bench said, is a parity clause meant only to align the rate of duty with comparable foreign imports. It does not create a charging event and cannot expand the scope of Section 12 of the Customs Act, which permits customs duty only on goods actually imported into India.

On the use of exemption notifications, the court drew a hard boundary. Section 25 of the Customs Act, it said, confers a beneficent power to relax or remit an existing levy. It cannot be used to impose a new tax where the statute does not authorise one. Framing a levy as an “exemption” notification when the base rate itself was nil amounted to a colourable exercise of delegated power, violating Article 265 of the Constitution, which bars taxation without authority of law.

The court also rejected the HC’s approach of treating each subsequent notification as a fresh and insulated measure. Once the foundational levy was found to be ultra vires, later notifications altering rates could not survive independently. As the bench put it, “where the root is ultra vires, the branch cannot claim legitimacy by altering its foliage.”

The SC bench also said that a coordinate Bench cannot narrow or sidestep an earlier declaration of law without referring the issue to a larger Bench. “The law cannot change with the change of the Bench,” the court observed, adding that courts are not bound to insist on repetitive challenges to identical measures. The State, it said, “must exemplify obedience to judgments, not resistance to them.”