When the executive oversteps: SC rewrites the rules on taxation

Introduction

The Supreme Court of India has resolved a long-standing dispute concerning the levy of customs duty on electricity generated within a Special Economic Zone (“SEZ”) and supplied to the Domestic Tariff Area (“DTA”).

In Adani Power Ltd. v. Union of India, the Court held that there was no statutory authority permitting the levy of customs duty on electricity supplied from an SEZ to the DTA. Consequently, the Court directed refund of all customs duties collected from Adani Power Limited between September 2010 and February 2016.

The judgment is significant not only for the law governing SEZs and indirect taxation, but also for its broader constitutional observations concerning delegated legislation, the limits of executive power, and the doctrine of precedent.

Background

Adani Power Limited operates a 5,200 MW coal-based thermal power plant within the Mundra Special Economic Zone. A substantial portion of the electricity generated at the plant is supplied to consumers in the DTA, including State distribution utilities.

Under Section 30 of the Special Economic Zones Act, 2005 (“SEZ Act”), goods cleared from an SEZ into the DTA are treated as imports into India. Historically, however, imported electrical energy attracted a nil rate of customs duty and therefore no independent customs duty was levied on such electricity supply.

In 2010, the Central Government issued Notification No. 25/2010-Cus., imposing customs duty at the rate of 16% ad valorem on electricity cleared from SEZs into the DTA, with retrospective effect from June 2009. Subsequent notifications later modified the levy to ₹0.10 per unit and subsequently ₹0.03 per unit.

In 2015, the Gujarat High Court struck down the notification framework. The High Court held, inter alia, that:

• there was no taxable event under Section 12 of the Customs Act, 1962;
• the exemption power under Section 25 of the Customs Act had been improperly utilised; and
• retrospective taxation could not be validly imposed through subordinate legislation.

Despite the 2015 judgment, customs duties continued to be recovered under subsequent notifications. When Adani Power sought enforcement of the earlier judgment and refund of the amounts collected, a different Division Bench of the Gujarat High Court, in 2019, declined relief on the ground that the earlier ruling was confined to the original notification and that subsequent notifications had not been separately challenged.

The Supreme Court has now set aside the 2019 judgment in its entirety.

Key Legal Findings of the Supreme Court

1. The 2015 Gujarat High Court Judgment Was Structural in Nature

The Supreme Court held that the 2015 Gujarat High Court ruling was not confined merely to Notification No. 25/2010-Cus. or to a particular period of time. Rather, the earlier judgment addressed the foundational illegality underlying the levy itself.

The Court observed that the absence of a valid taxable event and the improper use of delegated powers rendered the entire framework legally unsustainable. Subsequent notifications merely altering the rate of duty could not cure that underlying defect.

The judgment therefore reaffirmed that subordinate legislative instruments cannot survive where the parent exercise of power itself is unconstitutional or beyond statutory authority.

2. Taxation Requires Clear Statutory Authority

The Court reaffirmed the settled constitutional principle that taxation must derive from a valid charging provision enacted by Parliament.

The executive cannot expand the scope of taxation through delegated legislation or exemption notifications.

The judgment distinguished between:

• the power to impose a tax, which must originate from legislation; and
• the power to grant exemptions, which operates within the framework of an existing valid levy.

The executive cannot indirectly create a new tax liability under the guise of exercising exemption powers.

3. Fresh Challenges to Each Notification Were Not Required

The Supreme Court also rejected the argument that Adani Power was required to separately challenge every subsequent notification issued by the Government.

The Court held that the proceedings initiated in 2016 were essentially enforcement proceedings arising from the earlier declaration of invalidity. Requiring separate constitutional challenges to each successive notification would elevate procedural form over substantive legality and would permit continuation of an already invalid levy through repetitive subordinate instruments.

The Court clarified that once the foundational defect had been judicially determined, subsequent notifications based on the same impermissible exercise of power could not independently survive.

4. Judicial Discipline and the Doctrine of Stare Decisis

A significant aspect of the judgment relates to judicial discipline and the doctrine of stare decisis.

The Supreme Court held that the 2019 Division Bench of the Gujarat High Court, being a coordinate bench, was bound either to follow the 2015 judgment or refer the matter to a larger bench if it disagreed with the earlier reasoning.

By attempting to narrow the effect of the earlier judgment without such reference, the coordinate bench acted contrary to established principles governing judicial precedent.

The Court further held that restitution is a natural consequence of any judicial finding that a levy was unlawful. Accordingly, the State could not retain amounts that it was never legally entitled to collect.

Legal and Regulatory Implications

Limits on Delegated Legislative Power

The ruling reinforces constitutional limits on executive rule-making and delegated legislation. The executive cannot create substantive tax liabilities without express legislative authority.

This principle is likely to have broader implications in sectors where fiscal or regulatory obligations are sought to be imposed primarily through notifications, circulars, or subordinate instruments.

Strengthening the Doctrine of Precedent

The judgment also serves as a strong reaffirmation of judicial discipline and institutional consistency. Coordinate benches cannot effectively overrule or dilute earlier binding decisions without following established referral mechanisms.

This aspect of the ruling may have broader significance for tax and commercial litigation, where conflicting interpretations by coordinate benches often create prolonged uncertainty.

Implications for SEZ Operations

From an SEZ law perspective, the judgment clarifies that supplies from SEZs to the DTA cannot automatically attract customs duties absent a valid statutory charging mechanism.

The decision may therefore influence future disputes concerning the treatment of electricity, services, and other non-traditional goods under the SEZ framework and customs law.

Conclusion

The Court unequivocally held that customs duty on electricity supplied from SEZs to the DTA lacked statutory authority and therefore could not be sustained in law. In doing so, the Court reinforced the principle that taxation must be founded upon a valid legislative charging provision and cannot be created through executive notifications or delegated instruments.

The ruling also strongly reaffirms the doctrine of stare decisis and the importance of judicial discipline in maintaining institutional consistency and legal certainty.

By directing refund of unlawfully collected duties, the Court underscored that the State cannot retain amounts collected without lawful authority. The judgment therefore represents an important precedent not only for indirect tax jurisprudence, but also for the broader constitutional relationship between legislative power, executive action, and judicial oversight.