Electricity Supplied Ltd: Supreme Court Holds No Customs Duty Leviable on Electricity Supplied from SEZ to DTA [Read Order]

The Supreme court, in the matter of Adani Limited has ruled that no customs duty leviable on the electricity supplied from its Special Economic Zone ( SEZ ) unit to the Domestic Tariff Area ( DTA ). The apex court, while setting aside the order of the Gujarat High Court dated 28 June 2019 directed refund of duties collected for the disputed period.

“Once a levy has been held to be beyond the authority of law, a constitutional court is not expected to remain a silent spectator while the very same levy is sought to be continued through successive or similar notifications” said the bench of Justices Aravind Kumar and N.V. Anjaria.

Adani power limited filed the appeal before the Supreme Court challenging the customs duty invocation for the electricity supplied. The company generates electricity from its coal-based thermal power plant located in the Mundra SEZ, Gujarat. A good part of the electricity was supplied to consumers in the DTA.

While electricity imported into India attracts nil customs duty, the Union Government sought to levy customs duty on SEZ-generated electricity supplied to the DTA through a series of customs notifications issued between 2010 and 2012, seeking to impose duty on electricity supplied from SEZs to the DTA, initially at 16% ad valorem (with retrospective effect), and later at specific rates of 10 paise and 3 paise per unit.

Though an earlier 2015 Gujarat High Court judgment struck down the levy of customs duty on SEZ- to-DTA electrical energy was delivered by a Division Bench of that Court. The Union of India challenged that judgment before this Court. This Court declined interference. Therefore the decision of the High Court was upheld.

However later, writ petition filed in 2016 by the appellant came to be heard in 2019 by another Division Bench of the same High Court. In the said case, noting the existence of the 2015 judgment, proceeded on the basis that the earlier decision was confined to Notification No. 25/2010-Cus. and to the period ending 15 September 2010.

The apex court reviewed the 2015 Gujarat High Court judgment and said that the decision was not a limited adjudication confined to the validity of one notification or to a closed span of time. It was a declaration of law founded on constitutional and statutory interpretation, determining that on the then-existing legislation no customs duty could be levied on electrical energy transmitted from an SEZ to the DTA.

The bench said the 2015 judgement went to the root of the taxing power i.e., it identified the absence of a charging event, the misuse of the exemption power, and the inherent arbitrariness of the scheme.

With regards to the notifications, the court noted that “Section 30 of the SEZ Act continued unchanged; the Customs Tariff continued to prescribe a nil rate on imported electrical energy; and the constitutional parameters of Articles 14 and 265 remained constant. The subsequent notifications merely varied the form and rate of duty; they did not cure the fundamental absence of authority to tax.”

“In the absence of any new statutory basis, such notifications do not create a new cause of action. A constitutional court is entitled to grant effective relief without insisting upon separate challenges to each such notification. The High Court, in the impugned judgment of 2019, erred in taking a contrary view” highlighted the court.

The court with regard to the decision of the 2019 division bench of Gujarat High Court said that if the division bench was of the opinion that the 2015 decision could not, or ought not, apply to the later notifications or to the later period, the proper course was to request that the question be placed before a larger Bench of the High Court.

The Bench in 2019 did not do so. Instead, it narrowed the effect of the 2015 judgment and declined relief for the subsequent years, observed the apex bench saying “The 2019 Bench was bound by the declaration of law in 2015, unless duly referred to a larger Bench.”

The 2019 Bench, by confining the earlier decision to a narrow time frame without referring the matter to a larger Bench, effectively unsettled a settled proposition and undermined the authority of precedent. Such a course was impermissible, says the division bench of the apex court.

“Once it is held that the levy itself was without authority of law, the State cannot retain the amount collected under such levy. Restitution is a necessary incident of the finding of illegality” concluded the court.

While upholding the decision of the 2015 bench, the supreme court declared that no customs duty was leviable on electricity supplied from Adani Power’s SEZ unit to the DTA. It directed the customs authorities to refund the amounts collected after verification without interest.

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