Introduction
The Supreme Court’s decision in Adani Power Ltd. v. Union of India [(2026) 38 Centax 90 (SC)] is not merely another tax dispute arising out of India’s Special Economic Zones (“SEZ”) regime. It is a restatement of fundamental constitutional principles governing taxation, such as the requirement that all levies have explicit legislative sanction, the prohibition against using delegated legislation to impose taxes that Parliament has not authorized, and the binding nature of judicial pronouncements on both subordinate authorities and coordinate courts.
The Supreme Court firmly rejected the Union Government’s attempt to impose customs tax on energy delivered from a SEZ to the Domestic Tariff Area (“DTA”) through a series of so-called “exemption” announcements in a well-reasoned ruling. The Court held that an illegality at the source cannot be cured by altering rates, labels, or drafting techniques. For SEZ developers, fiscal administrators, and constitutional lawyers, the ruling marks a significant assertion of constitutional discipline over executive taxation.
Statutory Framework: SEZs, Customs and the Deeming Fiction
SEZ’s are seen as separate fiscal enclaves to support infrastructure development and exports, although they are not foreign territory. products cleared from a SEZ into the DTA are subject to customs duties “as if such goods had been imported into India,” according to Section 30 of the SEZ Act, 2005. This clause aims to achieve parity: products traveling from a SEZ to the domestic market should be subject to the same customs procedures as those that are physically imported into India. The customs duty charging clause is found in Section 12 of the Customs Act of 1962. It permits the imposition of duties on products “imported into India.” Importantly, there was no customs charge on imported electrical energy before 2009. As a result, there was no customs charge on electricity delivered to the DTA from SEZs. Rule 47(3) of the SEZ Rules, 2006 previously provided protection for revenue neutrality. According to this rule, the benefit of duty-free imports must be proportionately neutralized when power produced with them is given to the DTA. Therefore, the statutory framework deliberately avoided charging electricity as a final product any separate customs charge.
Genesis of the Dispute: From Parity to Levy
When the Central Government published Notification No. 25/2010 Cus. in 2010 under Section 25 of the Customs Act, this balance was upset. With retroactive effect from June 26, 2009, it effectively levied a customs charge of 16% ad valorem on power cleared from SEZs to the DTA, although being presented as an exemption notification. The government altered the structure of the levy through later announcements while the challenge to this notification was pending. The ad valorem charge was replaced by a particular duty of ten paise per unit in Notification No. 91/2010 Cus. This duty was subsequently lowered to three paise per unit by Notification No. 26/2012 Cus. The charge itself persisted even when the rates were altered. Adani Power successfully challenged the retrospective levy before the Gujarat High Court in 2015. The High Court struck down the levy as ultra vires, a decision that was affirmed by the Supreme Court. However, when Adani sought refund of duties paid under the later notifications, a coordinate Bench of the High Court declined relief, treating the 2015 judgment as confined only to the first notification. This led to the present appeal.
Can an Exemption Notification Create a Tax?
The Hon’ble Supreme Court provided a definitive and unambiguous response on the main question. The Central Government may exempt otherwise leviable customs duties under Section 25 of the Customs Act. The establishment of a new levy is not authorized by it. It is not possible to turn an exemption clause into a billing mechanism. There is no “import into India” as defined by Section 12 of the Customs Act when electricity produced inside a SEZ is routed into the DTA. The aim of the deeming fiction under Section 30 of the SEZ Act is restricted to bringing the duty rate for SEZ clearances into line with the rate for imports of comparable items. By using an exemption notification to impose a duty where none existed, the executive indulged in what the Court characterized as a colorable exercise of delegated power. The power to exempt is a power to relax; it is not a power to tax. Such inversion of purpose renders the delegated legislation ultra vires at its inception.
Retrospective Taxation and Article 265
The retrospective nature of the levy further compounded its illegality. No tax may be imposed or collected unless authorized by legislation, according to Article 265 of the Constitution. Although retrospective taxation may be passed by Parliament in certain circumstances, the executive cannot use this authority through subordinate law unless specifically permitted. There was absolutely no legitimate charging provision in this instance. As a result, the levy did not pass the threshold constitutional test. Retrospectivity emphasized the total lack of legislative capacity rather than just making the levy harsh or unfair.
Double Burden and Fiscal Arbitrariness
The Court also gave careful consideration to the levy’s economic effects. When power was supplied to the DTA, duty-free inputs were already guaranteed to be neutralized under Rule 47(3) of the SEZ Rules. The same industrial activity was subject to double taxation when customs duty was imposed on the electrical produced once more. The Court determined that such a system violated Article 14 of the Constitution and was intrinsically arbitrary. Fiscal policies must meet constitutional requirements for reason and fairness, even if they are expressed in technical terms.
Binding Precedent and Judicial Discipline
A significant portion of the judgment is devoted to the doctrine of precedent. The Gujarat High Court attempted in 2019 to limit its earlier 2015 decision to a specific notification and time frame, but the Supreme Court rejected this move. The 2015 ruling’s conclusions that there was no charging event, that the exemption power was abused, and that Articles 14 and 265 were violated formed the ratio decidendi and were not incidental observations. All ensuing notices based on the same foundation inevitably crumbled once the Supreme Court upheld the levy’s extra vires foundation. A coordinate Bench could not reopen settled questions by focusing on cosmetic differences in later notifications. If it doubted the correctness or applicability of the earlier ruling, judicial discipline required a reference to a larger Bench. Invoking the maxim interest reipublicae ut sit finis litium, the Court reminded the State that it must exemplify obedience to judgments, not resistance to them. Judicial pronouncements are binding commands of law, not advisory opinions open to administrative reinterpretation.
Limits of Delegated Legislation Reaffirmed
The ruling acts as a more general cautionary tale about the growing application of delegated legislation in fiscal governance. Although modern taxation necessitates flexibility, constitutional boundaries cannot be blurred by such flexibility. The Supreme Court reiterated that legal fictions must be limited to their legislative purpose, that delegated legislation cannot replace a charging provision, and that changing the rate or form of an unconstitutional levy does not remedy its underlying illegality.
AMLEGALS Remarks
Adani Power Ltd. v. Union of India is a structural judgment rather than a time‑bound one. It clarifies the architecture of taxing power under the Constitution and reinforces the separation between legislative authority and executive administration. For SEZ units, the decision provides long‑awaited certainty that electricity supplied to the DTA cannot be subjected to customs duty without clear legislative sanction. For policymakers, it underscores the need to respect constitutional limits while designing fiscal measures. Above all, the judgment reinforces a fundamental principle of the rule of law: exemption cannot become exaction, and delegated power cannot be transformed into legislative authority by executive ingenuity.
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