Section 25 Customs Exemption Power Cannot Be Used to Create a Levy: SEZ-to-DTA Electricity Not Dutiable; Coordinate Benches Must Follow Binding Declarations

1. Introduction

Case: ADANI POWER LTD. v. UNION OF INDIA (2026 INSC 1), Supreme Court of India (05-01-2026).
Parties: Adani Power Ltd. (SEZ-based power generator at Mundra SEZ, Gujarat) versus Union of India and customs authorities.
Background: Adani generated electricity inside a notified Special Economic Zone (SEZ) and supplied a substantial portion to the Domestic Tariff Area (DTA). Customs authorities demanded “customs duty” on electricity cleared from SEZ to DTA under successive notifications (ad valorem initially; later per-unit rates). A Gujarat High Court judgment in 2015 had struck down the levy (for 26 June 2009 to 15 September 2010). The dispute here concerned the later period (16 September 2010 to 15 February 2016), when Adani paid per-unit duties under later notifications and sought refund.

Key issues: (i) Whether the 2015 declaration was a general declaration of law or confined to a particular notification/period; (ii) whether later notifications could continue the levy despite the 2015 ruling; (iii) whether refund could be granted without separately challenging each later notification; (iv) whether a coordinate High Court Bench could narrow an earlier binding decision without a reference to a larger Bench; and (v) appropriate directions.

2. Summary of the Judgment

The Supreme Court allowed the appeal, set aside the Gujarat High Court’s 2019 decision, and declared that customs duty on electrical energy cleared by the appellant from SEZ to DTA during 16 September 2010 to 15 February 2016 was without authority of law. The Court held that:

• The 2015 Gujarat High Court decision was a structural declaration going to the absence of a lawful charging event and misuse of delegated power, not a time-bound relief.
• There was no material change in law or facts to justify a different outcome for the later period.
• It was unnecessary to mount repetitive challenges to each successor notification where the levy was substantively the same and already held ultra vires.
• A coordinate Bench could not “read down” the earlier declaration; if in doubt, it had to refer to a larger Bench.

Relief: Refund of amounts paid under protest for 16 September 2010 to 15 February 2016, after verification, within 8 weeks, without interest; and no further demand for that period.

3. Analysis

3.1 Precedents Cited

State of Uttar Pradesh v. Ajay Kumar Sharma (2016) 15 SCC 289

The Court relied on this authority for the rule of judicial discipline among coordinate Benches: once a coordinate Bench of a High Court has settled a question of law, a subsequent Bench of equal strength must follow it; if it doubts correctness or applicability, it must refer the question to a larger Bench rather than sidestep or narrow the earlier ruling.

Influence on outcome: This precedent directly underpinned the Supreme Court’s conclusion that the Gujarat High Court (2019) erred by confining the 2015 ruling to Notification No. 25/2010-Cus. and a closed period, without making a reference to a larger Bench. The Supreme Court treated the 2019 approach as institutionally impermissible and a basis to set aside the judgment.

3.2 Legal Reasoning

(A) The “authority of law” problem: no charge without a charging event (Section 12, Customs Act)

The Court treated Section 12 of the Customs Act, 1962 as the charging provision for customs duties, which levies duty on goods “imported into” (or exported from) India. Electricity generated inside India within an SEZ and supplied to the DTA is not, in substance, an “import into India.” The Court reaffirmed the 2015 conclusion that the alleged taxable event is absent, making the levy jurisdictionally defective.

(B) Section 30, SEZ Act is a parity clause, not an independent charging provision

Section 30 of the SEZ Act, 2005 provides that goods removed from SEZ to DTA are chargeable to customs duties “as leviable on such goods when imported.” The Supreme Court read this as a rate-parity mechanism (align SEZ-to-DTA treatment with actual import treatment), not a legal transformation of domestic supply into import for creating a new charge. Since “imported electrical energy” carried a nil rate, parity logic pointed to nil customs duty on SEZ-to-DTA electricity as well.

(C) Misuse of delegated power: Section 25 “exemption” notifications cannot impose a tax

Central to the Court’s reasoning is the sharp distinction between: (i) a legislative decision to levy a duty via a charging provision, and (ii) executive power under Section 25 of the Customs Act to grant exemptions from duty that is “leviable thereon.”

The Court endorsed the 2015 characterization of Notification No. 25/2010-Cus. as a colourable exercise: framed as an “exemption” but operating as a duty-imposing instrument (and retrospectively). The Court extended this reasoning to successor notifications: altering the duty’s form (ad valorem to specific rate) or its rate (16% to 10 paise to 3 paise) does not cure the core defect—Section 25 cannot be an engine to create a levy absent statutory charge.

(D) Anti-double-burden logic: Rule 47(3) already neutralizes input benefits

The Court emphasized Rule 47(3) of the SEZ Rules, 2006, which already requires payment of duty on consumables/raw materials used for generation when surplus power is supplied to DTA—i.e., a clawback of duty benefit on inputs. Imposing an additional “customs duty” on the electricity output would amount to a structurally unfair double incidence on the same economic stream (inputs neutralization plus output duty), reinforcing invalidity and arbitrariness concerns.

(E) Article 265 and Article 14 constraints

Under Article 265, no tax can be levied or collected except by authority of law. The Court treated the absence of a lawful charging basis, coupled with an attempted imposition through delegated notifications, as squarely offending Article 265. It also reaffirmed the parity/equality concern (imported electricity at nil vs SEZ electricity taxed) as constitutionally suspect under Article 14.

(F) “No need to challenge each successor notification”: remedial constitutional adjudication

The Supreme Court rejected the Union’s procedural objection that refunds could not be ordered unless Notification No. 91/2010-Cus. and Notification No. 26/2012-Cus. were each separately impugned. The Court treated the 2016 petition as a sequel seeking implementation of an already-final declaration of illegality. A State cannot perpetuate a levy already held ultra vires by issuing successor notifications and then insist upon endless fresh rounds of litigation.

(G) Binding force of prior declaration and executive obligation to implement

Beyond inter-Bench discipline, the Court stressed the executive’s obligation to conform to final judicial declarations. Once the levy had been struck down and non-interference/review dismissal followed, continued enforcement through altered notifications was viewed as inconsistent with rule-of-law values and finality (the Court invoked the public interest in ending litigation).

3.3 Impact

• Limits on fiscal delegated legislation: Reinforces that exemption powers (Section 25) cannot be used as a substitute for legislative imposition of a tax/duty; “exemption-form” cannot mask “levy-substance.”
• SEZ parity jurisprudence: Strengthens the reading of Section 30, SEZ Act as ensuring parity with actual imports, limiting executive attempts to selectively burden SEZ-to-DTA clearances where import rates are nil.
• Refunds and restitution: Establishes that once a levy is held without authority of law, restitution follows, and procedural formalism should not defeat refunds for successor iterations of the same levy (though the Court here denied interest).
• Judicial discipline and institutional consistency: Makes clear that coordinate High Court Benches cannot narrow earlier ratio; disagreement requires reference to a larger Bench, bolstering predictability for taxpayers and administrators.
• Administrative compliance expectations: Signals that after final adjudication, the State should implement the declaration broadly rather than re-litigate through marginally altered instruments.

4. Complex Concepts Simplified

• Charging provision: The statutory provision that creates the tax liability (here, Section 12). Without it, no tax can be imposed.
• Taxable event: The legally recognized trigger for tax (for customs duty, “import into India”). If the event does not occur in law, the levy fails.
• Delegated legislation: Rules/notifications issued by the executive under authority given by Parliament. It cannot exceed the scope of the parent statute.
• Exemption notification (Section 25): A tool to reduce/remit duty that is otherwise lawfully leviable; it is not a power to invent a new duty.
• Colourable exercise of power: Doing indirectly what cannot be done directly—e.g., using an “exemption” format to impose a levy.
• Coordinate Bench discipline: Benches of equal strength must follow earlier decisions on the same issue; if they disagree, they must refer to a larger Bench.
• Restitution: Returning money collected without lawful authority; the Court treated it as a necessary incident of declaring the levy illegal.

5. Conclusion

ADANI POWER LTD. v. UNION OF INDIA (2026 INSC 1) crystallizes three interconnected principles: (i) customs duty cannot be demanded on SEZ-to-DTA electricity absent a lawful charging event under Section 12, and Section 30 of the SEZ Act functions as parity, not as a fresh charging source; (ii) Section 25 exemption power cannot be weaponized to impose a levy, even if the levy is repackaged through successive notifications; and (iii) judicial finality has operational consequences—coordinate Benches must follow binding declarations, and the State must implement them rather than perpetuate the same levy through altered forms. The decision is a significant reaffirmation of Article 265 discipline, limits on delegated fiscal action, and institutional coherence in precedent.