SC Draws a Hard Line on Taxing Power: Why SEZ Electricity Is Not a “Foreign Import”

The Gujarat High Court’s First Ruling: A Narrow but Clear Finding (2015)

In 2015, a coordinate bench of the Gujarat High Court ruled in Adani Power’s favour—but on deliberately narrow grounds. The court held that customs duty under Section 12 of the Customs Act, 1962 could only be levied when goods were actually imported into India. Electricity moving from an SEZ to the DTA, the bench reasoned, did not cross India’s international border and therefore could not satisfy the charging event required under the Customs Act.

Crucially, the court characterised Section 30 of the SEZ Act, 2005—which states that goods cleared from an SEZ into the DTA shall be chargeable to customs duty “as if such goods had been imported into India”—as a rate-alignment provision, not an independent source of taxing power. A provision designed to waive or equalise duties, the bench held, could not be repurposed to create a levy where none otherwise existed.

However, the High Court did not invalidate the levy in absolute terms for all future scenarios. Instead, it limited relief to the specific notifications then under challenge. This calibrated approach would later become central to the dispute.

The Executive Response: Changing the Rate, Not the Levy

Rather than abandoning the levy after the 2015 ruling, the Union government altered its form. It replaced the earlier percentage-based duty with a nominal per-unit charge on electricity supplied from SEZs to the DTA. Although the quantum of tax fell sharply, the underlying assertion of taxing power remained intact.

This shift allowed the government to argue that it was no longer enforcing the same levy that the High Court had previously questioned, but a new and distinct impost arising from fresh notifications. Adani Power, maintaining that the legal defect lay at the root of the levy itself, initiated a second round of litigation.

The Gujarat High Court’s 2019 Ruling: Formal Continuity Over Substantive Validity

In its 2019 judgment, the Gujarat High Court declined to grant Adani Power further relief, adopting a markedly different analytical lens from the earlier coordinate bench.

First, the court treated the 2015 ruling as fact- and time-specific, holding that the relief granted then was consciously limited and could not be automatically extended to later notifications unless those notifications were directly challenged on their own terms. Since Adani Power had not mounted a fresh constitutional challenge to the subsequent notifications, the court reasoned that it could not reopen the earlier finding.

Second, the High Court expressed concern about the risk of “double benefit”. It noted that under Rule 47(3) of the SEZ Rules, SEZ units are ordinarily required to pay back duties on inputs—such as coal—when finished goods are cleared into the DTA. Since the enforcement of this rule had been kept in abeyance, the court worried that exempting both inputs and outputs could tilt the fiscal balance unfairly in favour of the SEZ unit.

Third, the court accepted the government’s argument that exemptions granted to electricity imported from Nepal and Bhutan were country-specific, not general, and therefore did not automatically establish rate parity for SEZ electricity.

Taken together, the 2019 ruling reflected a procedural and compartmentalised approach: each notification was treated as a discrete legal instrument, insulated from earlier findings unless expressly invalidated. The court focused less on the constitutional validity of the levy’s foundation and more on whether each successive notification had been independently assailed.

What the Supreme Court Changed—and Why

The Supreme Court decisively rejected this compartmentalised reasoning.

Allowing Adani Power’s appeal, the bench comprising Justices Aravind Kumar and N.V. Anjaria returned to the charging architecture of tax law itself. It held that electricity supplied from an SEZ to the DTA is an internal supply, not an import. While an SEZ is fiscally distinct for certain purposes, it does not become foreign territory.

The “as if imported” language in Section 30 of the SEZ Act, the court clarified, is purely a parity mechanism, intended to align the applicable rate of duty where a valid levy already exists. It does not—and cannot—create a new charging event. That power rests solely with Section 12 of the Customs Act, which is triggered only by actual importation into India.

On the use of exemption notifications, the court drew a sharp constitutional boundary. Section 25 of the Customs Act, it said, confers a beneficent power to relax or remit an existing duty in the public interest. It cannot be used to manufacture a levy when the base rate is nil. Doing so amounts to a colourable exercise of delegated power and violates Article 265 of the Constitution, which mandates that no tax shall be levied or collected except by authority of law.

The Supreme Court also directly addressed the coordinate-bench issue. Once a levy is declared ultra vires, the court held, later notifications altering rates or formats cannot survive independently. As the bench memorably put it, “where the root is ultra vires, the branch cannot claim legitimacy by altering its foliage.” A coordinate bench cannot dilute or sidestep an earlier declaration of law without referring the matter to a larger bench.

Below are Plug-ins 4, 5, and 6, written to drop cleanly into the existing Rida summary without disturbing tone or flow. They are descriptive, analytical, and institution-facing, not argumentative, and assume an informed but non-specialist reader.

What This Means for India’s SEZ Framework and Investor Confidence

The Supreme Court’s ruling has implications that extend well beyond the immediate tax dispute. At a policy level, it reaffirms the original logic of India’s Special Economic Zone (SEZ) framework: SEZs are designed to be fiscally distinct for export promotion, not to function as quasi-foreign territories for the purpose of inventing new domestic levies.

Crucially, the judgment does not grant SEZ units blanket immunity from taxation. Instead, it restores predictability by clarifying how far fiscal deeming provisions can go. Section 30 of the SEZ Act, the court held, is a rate-parity mechanism, not a source of independent taxing power. This distinction matters for investors because it draws a clear boundary between legitimate alignment with customs rates and ad-hoc fiscal experimentation through notifications.

For SEZ operators and foreign investors, the ruling reduces regulatory risk. One of the long-standing criticisms of India’s SEZ regime has been its susceptibility to retrospective or creatively structured levies that dilute promised incentives after capital has already been sunk. By holding that the executive cannot resurrect an invalid tax through rate adjustments or repackaged notifications, the court strengthens the credibility of SEZ assurances without expanding them.

In comparative terms, the judgment nudges India closer to global SEZ practice. Jurisdictions such as China and Vietnam treat SEZs as domestically located production zones with targeted incentives, not as convenient fiscal fictions to generate revenue through indirect taxation. The ruling reinforces that India’s SEZs are part of its internal economic geography, not fiscal grey zones.

Is This a Revenue Risk for the Centre?

Despite the headline impact, the fiscal consequences of the judgment are limited. Electricity imported from foreign sources has long attracted a nil customs duty, and the levy imposed on SEZ-to-DTA electricity was never a significant or stable revenue stream. The dispute was less about revenue mobilisation and more about the principle of authority.

The refund ordered—covering duties collected between 2010 and 2016—does not materially alter the Centre’s fiscal position. More importantly, the court’s reasoning does not constrain Parliament’s power to impose a tax through proper legislation. What it curtails is the ability of the executive to create or sustain a levy without statutory backing, particularly through subordinate legislation dressed up as an exemption framework.

Seen this way, the judgment improves fiscal hygiene rather than undermining fiscal capacity. It draws a distinction between revenue foregone by policy choice and revenue demanded without legal foundation. For the exchequer, the long-term gain lies in reduced litigation, clearer tax bases, and fewer credibility shocks that arise when levies collapse after years of enforcement.

Why Courts Are Pushing Back Against Notification-Driven Taxation

The Adani Power ruling fits into a broader judicial pattern: growing intolerance for taxation that relies more on executive ingenuity than legislative clarity. Over the past decade, successive governments have increasingly used notifications, circulars, and delegated instruments to tweak fiscal outcomes—sometimes to adjust rates, sometimes to neutralise adverse judgments, and occasionally to keep disputed levies alive.

What the Supreme Court has signalled here is a firm boundary. Delegated legislation may modify, relax, or exempt an existing levy, but it cannot manufacture a charge where none exists, nor can it preserve a tax after its legal foundation has been struck down. The court’s characterisation of such exercises as “colourable” underscores a constitutional concern: that executive convenience is being allowed to erode parliamentary control over taxation.

Equally important is the court’s emphasis on judicial finality. By rejecting the idea that each successive notification must be challenged afresh, the bench curtailed a common administrative strategy—forcing taxpayers into repeated litigation over substantively identical measures. This reasserts that judgments are binding declarations of law, not advisory signals for regulatory improvisation.

Taken together, the ruling reflects a judicial recalibration. As tax systems become more complex and executive discretion expands, courts are increasingly acting as guardians of constitutional boundaries, ensuring that efficiency and revenue considerations do not override the foundational requirement that taxes must rest on clear legislative authority.

Refunds, Finality, and a Broader Constitutional Message

The court ordered the Union government to refund all customs duties collected from Adani Power between September 2010 and February 2016 within eight weeks, without interest, and barred any further demands on the same footing.

More broadly, the judgment sends a clear institutional message. Judicial decisions are not advisory opinions that the executive may work around through iterative notification-making. Once a tax is struck down for want of legislative authority, administrative persistence cannot resurrect it.

Why This Matters

The ruling has implications far beyond electricity or SEZs. It reinforces three core principles:

• Taxing power must be explicit and statutory, not inferred through deeming fictions.
• SEZs are fiscally distinct, not foreign soil, and internal supplies do not become imports by administrative fiat.
• The State is bound by judicial declarations of law, and cannot keep an invalid levy alive through procedural manoeuvres.

At a time when delegated legislation is increasingly used to fine-tune fiscal policy, the Supreme Court’s judgment is a firm constitutional reminder: administrative ingenuity ends where legislative authority does.