In a landmark judgment with significant implications for Special Economic Zones (SEZs) and tax policy, the Supreme Court of India has delivered a major victory to Adani Power Limited. The apex court, on January 5, categorically held that the Union government has no legal authority to levy customs duty on electricity supplied from an SEZ to the domestic market, overturning a 2019 Gujarat High Court order.
The Core of the Dispute: Is SEZ Electricity an Import?
The legal battle revolved around a fundamental question: can electricity wheeled from a Special Economic Zone to the Domestic Tariff Area (DTA) be treated as an import and taxed under customs laws? The case specifically involved electricity generated by Adani Power's thermal plant inside the Mundra SEZ in Gujarat, which was supplied to distribution companies in the DTA—the area covering the rest of India outside SEZs.
While electricity imported from foreign countries enjoyed a nil rate of duty, the central government, through a series of customs notifications starting in 2010, sought to impose a duty on electricity cleared from SEZs into the domestic market. A contentious aspect was the retrospective application of this levy, creating a large, unexpected tax demand for power that had already been sold.
Legal Tug of War: From Gujarat HC to Supreme Court
Adani Power first challenged this levy before the Gujarat High Court in 2010. In a 2015 judgment, a bench of the High Court ruled in the company's favour, stating that customs duty can only be charged on goods actually imported into India. It held that electricity moving from an SEZ to the DTA does not cross India's foreign border and thus cannot be considered an import.
However, instead of withdrawing the levy, the government replaced the percentage-based tax with a smaller per-unit charge. This led to a second round of litigation, culminating in a 2019 Gujarat HC judgment that denied further relief to Adani Power. The High Court then raised concerns about a potential "double benefit" if both input duties (on raw materials like coal) and output duties (on electricity) were exempted.
Supreme Court's Definitive Verdict and Legal Reasoning
A Supreme Court bench comprising Justices Aravind Kumar and NV Anjaria allowed Adani Power's appeal, represented by senior advocate P Chidambaram. The court delivered a robust verdict with several key pronouncements:
The court held the levy was "without authority of law." It struck down the customs notifications and directed the government to refund all duties collected from Adani Power between September 2010 and February 2016, within eight weeks. The refund will carry no interest.
The bench provided a clear legal interpretation. It ruled 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 court explained that Section 30 of the SEZ Act, which states goods removed from an SEZ shall be chargeable to duty "as if imported," is merely a parity clause. It aligns the duty rate with comparable foreign imports but does not create a new charging event for taxation.
Critically, the court drew a hard boundary on the government's use of exemption powers. It stated that Section 25 of the Customs Act, which allows exemptions from duty, is a beneficent power to relax an existing levy. It cannot be used to impose a fresh tax where the parent statute does not authorise one. Creating a levy through an "exemption" notification when the base rate on imported electricity was nil was deemed a colourable exercise of power, violating Article 265 of the Constitution.
Broader Implications and a Warning to the Executive
The Supreme Court's judgment carries profound implications beyond this specific case. The bench made it unequivocally clear that the executive cannot keep an illegal tax alive by merely changing its rate or repackaging it through fresh notifications once its legal foundation has been struck down. "Where the root is ultra vires, the branch cannot claim legitimacy by altering its foliage," the court observed.
The court also emphasised the binding nature of judicial decisions, stating they are not "advisory opinions" that the State may choose to sidestep. It noted 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 said, adding that the State "must exemplify obedience to judgments, not resistance to them."
This ruling not only provides significant financial relief to Adani Power but also sets a crucial precedent for the taxation framework governing SEZs. It reinforces the principle of legal certainty and curbs the executive's ability to resurrect taxes declared illegal, ensuring that the government's taxing power is exercised strictly within the boundaries set by law.
