Fiscal Delegation, Judicial Discipline, and the Rule of Law: Insights from Adani Power Ltd. v. Union of India

By – Sangeeth Narayanan and Jane Kapai

Table of Contents

INTRODUCTION

In its recent decision in Adani Power Limited v. Union of India SLP (C) No.24729/2019, the Supreme Court reaffirmed the constitutional limits governing fiscal administration and the exercise of delegated legislative power in matters of taxation. The Supreme Court set aside the Order dated 28.06.2019 passed by the Gujarat High Court in the Special Civil Application No. 2233 of 2016 (“2019 Order”), whereby the Gujarat High Court had declined to extend the protective effect of its earlier judgement dated 15.07.2015 in Special Civil Application No. 3142 of 2010 (“2015 judgement”) that struck down Notification No. 25/2010-Cus. imposing a retrospective 16% customs duty on electricity generated within a Special Economic Zone (“SEZ”) and supplied to the Domestic Tariff Area (“DTA”). The High Court had confined the relief to the period covered by the impugned notification and held that subsequent notifications could not be invalidated unless independently challenged. In the present matter, the Supreme Court set aside this ruling, holding that the 2015 judgment constituted a binding declaration of law in the absence of a new levy of a new statutory or factual footing, and consequently directed the refund of duties collected under the subsequent notifications.

Notwithstanding that the dispute arose in the specific context of customs duty on SEZ-generated electricity, the issues examined by the Supreme Court extend well beyond a fiscal controversy. At a more fundamental level, the judgment engages with core constitutional questions concerning the source of taxing power, the permissible scope of exemption notifications issued under delegated authority, the binding force of judicial precedent, and the obligation of the State to give full effect to settled declarations of law.

BACKGROUND OF THE CASE

The Appellant operates a large coal-based thermal power station within the Mundra SEZ in Gujarat. The electricity generated at the facility is partly used within the SEZ and substantially supplied to consumers in the DTA, including State utilities. 

SEZ Power Generation and Duty Framework Prior to 2010

Under Section 30 of the Special Economic Zones Act, 2005, (“SEZ Act”), goods cleared from an SEZ into the DTA are chargeable to duties of customs as if such goods had been imported into India. However, prior to 2009, imported electrical energy attracted a nil rate of customs duty under the Customs Tariff and as a result, electricity supplied from an SEZ to the DTA was effectively duty-free. Fiscal neutrality was instead ensured through Rule 47(3) of the SEZ Rules, 2006, (“SEZ Rules”) which required SEZ units generating power to neutralise the customs benefit availed on inputs, such as imported coal, in proportion to the electricity supplied outside the SEZ.

Imposition of Customs Duty Through Notification No. 25/2010-Cus.

This position changed in 2010, when the Union Government issued Notification No. 25/2010-Cus., imposing customs duty at 16% ad valorem on electricity supplied from SEZs to the DTA, with retrospective effect from June 2009. The Appellant Company challenged the levy under the said notification before the Gujarat High Court wherein interim relief permitting clearances against bank guarantees was granted. However, during the pendency of the litigation, the duty structure was modified. Notification No. 91/2010-Cus. replaced the ad valorem levy with a specific duty of ten paise per unit, effective from 16.09.2010, and Notification No. 26/2012-Cus. subsequently reduced it to three paise per unit, with effect from 18.02.2012. Notwithstanding these changes, the nature of the levy remained the same i.e., the customs duty imposed on electricity itself.

The 2015 Gujarat High Court Judgment and Its Finality

Vide the 2015 judgment, the Gujarat High Court struck down the levy in its entirety holding that there was no lawful charging event under Section 12 of the Customs Act, 1962, (“Customs Act”) that the exemption power under Section 25 of the Customs Act had been misused to levy tax, through Notification No. 25/2010-Cus., and that the levy resulted in an impermissible double burden since input duties were already neutralised under the SEZ Rules. The Supreme Court declined to interfere with the decision dismissing a subsequent review petition in 2016 and rendering the declaration as final. Noteworthily, although the levy was withdrawn prospectively in 2016, customs authorities continued to retain duties collected under the subsequent notifications for the period between 16.09.2010 and 15.02.2016. When the Appellant sought refunds, following the 2015 judgement, a Division Bench of the Gujarat High Court, vide the 2019 Order, denied relief on the ground that the later notifications had not been specifically challenged. This decision was carried in appeal to the Supreme Court.

RULING OF THE SUPREME COURT

Whether the 2015 Judgment Was Notification-Specific or a Declaration of Law

The central issue before the Supreme Court was whether the 2015 judgement merely invalidated a specific notification for a limited period, or whether it laid down a broader declaration of law that customs duty could not be levied at all on electricity supplied from an SEZ to the DTA under the existing statutory framework. 

The Supreme Court authoritatively ruled that the 2015 judgment was a declaration of law on the very absence of a lawful charging event and on the limits of delegated authority and that it was not confined to a particular notification or time period. Further, since there had been no material change in the statutory scheme or factual circumstance thereafter, the levy in any form, whether retrospective or prospective, ad valorem or specific remained without authority of law. 

Accordingly, the court set aside the 2019 Order and declared the levy unsustainable for the entire period in question and directed refund of the duties collected. 

DELEGATED LEGISLATION: WHEN EXEMPTION TURNS INTO TAXATION

Limits of Exemption Power Under Section 25 of the Customs Act

A central theme of the judgment lies in its treatment of delegated legislation under Section 25 of the Customs Act, which empowers the Central Government to grant exemptions from customs duty in the public interest. The Supreme Court emphasised that this power is inherently concessional and remedial, not legislative. It presupposes the existence of a duty that is otherwise lawfully leviable under Section 12 of the Customs Act, i.e., the charging section. 

Parity Principle Under the SEZ Act and Nil Duty on Imported Electricity

While Section 30 of the SEZ Act provides that goods removed to the DTA shall be chargeable to customs duty “as if imported,” the Court clarified that this is a parity provision, intended only to align the duty treatment of SEZ clearances with comparable physical imports. Since imported electricity attracted a nil rate of duty, parity demanded that SEZ-generated electricity supplied to the DTA also remain duty-free.

Colourable Exercise of Power and Absence of Charging Event

Notification No. 25/2010-Cus., though framed as an exemption notification, in substance created a new levy on electricity, something Parliament itself had not done. The Court characterised this as a colourable exercise of power, reiterating that the power to exempt cannot be used to invent a taxable event. The subsequent replacement of the ad valorem levy with specific per-unit duties under later notifications did not cure this fundamental defect. In the absence of any legislative change, these notifications were merely a continuation of the same illegality in an altered form.

The Court also invoked Article 265 of the Constitution, holding that retrospective imposition of duty through subordinate legislation, without a charging provision, is constitutionally impermissible. Altering the rate or method of computation cannot validate a levy that lacks statutory foundation.

Conflict Between Executive Notifications and the SEZ Rules

Importantly, the Court contrasted the impugned notifications with Rule 47(3) of the SEZ Rules, which already provided a carefully calibrated mechanism to address revenue concerns by requiring payment of duty on inputs used for power supplied to the DTA. The executive’s attempt to superimpose a customs duty on electricity itself was thus inconsistent with the legislative design and indicative of overreach.

DIVERGENCE OF THE COURTS: OBLIGATION OF COORDINATE BENCHES TO SETTLED LAW

Failure of the Gujarat High Court to Follow Binding Precedent

The Supreme Court was sharply critical of the 2019 order for its failure to adhere to the discipline of precedent. The 2015 judgment had categorically held the levy unconstitutional on principle, interpreting the relevant provisions of the Customs Act and the SEZ framework, as a declaration of law. 

By treating the earlier ruling as confined to a particular notification and period, the Division Bench through the 2019 order effectively diluted its binding force without any change in law or facts. The Supreme Court held this to be impermissible observing that the 2015 judgment stands as a general exposition of law and its ratio decidendi covers the subsequent period unless a demonstrable change in the legal foundation is shown. 

Doctrine of Stare Decisis and Limits of Judicial Disagreement

Relying upon its judgment in State of Uttar Pradesh v Ajay Kumar Sharma (2016) 15 SCC 289, the Supreme Court reiterated the doctrine of stare decisis, stating the importance of securing stability in judicial outcomes, that once a coordinate bench of  High Court has settled a question of law, a subsequent Bench of equal strength is bound to follow that view when confronted with the same issue. In any case, if the later Bench is of the view that the precedent is manifestly erroneous or inapplicable then it may refer the matter to a larger bench. What it is not allowed to do is to “segment” or procedurally neutralise a binding declaration of law, by treating it as a fact specific indulgence. In observance therefore, the Supreme Court stated, “The law cannot change with the change of the Bench.” Once a levy is struck down on principle, its continuation through successive subordinate instruments cannot be validated unless the underlying statute itself is amended. The failure of the High Court to observe this discipline undermined certainty, finality, and coherence in constitutional adjudication.

STATE ACCOUNTABILITY

State Obligation to Comply With Judicial Declarations

The judgment also carries a strong normative impact on State accountability under the rule of law. After the levy had been declared ultra vires in 2015, it was incumbent upon the executive to align its conduct with that declaration. Instead, the State continued to enforce the levy through modified notifications and resisted refund claims on procedural grounds, arguing that each notification required a separate challenge.

Restitution and Prohibition on Retaining Unlawful Collections

The Supreme Court rejected this approach as impermissible procedural segmentation. Once a foundational levy is declared unconstitutional, all derivative attempts to enforce it are equally unenforceable. Judicial decisions are binding commands, not advisory opinions, and the State cannot achieve indirectly what it is forbidden from doing directly.

The Court underscored that restitution in such cases is not a matter of grace but a constitutional requirement. The State cannot retain money collected without authority of law, and fiscal administration must exemplify obedience to judicial determinations rather than resistance to them.

CONCLUSION

Reaffirmation of Constitutional Limits on Fiscal Power

The decisions in Adani Power Ltd. v. Union of India is a reaffirmation of constitutional restraint in fiscal governance. By insisting on a clear legislative charge as the foundation of taxation, the Supreme Court has reinforced the limits of delegated power and the centrality of Article 265. The judgment makes clear that exemption provisions cannot be repurposed as instruments of taxation, and that executive convenience cannot substitute for parliamentary authority.

Judicial Discipline, Rule of Law, and Executive Compliance

Equally important is the Court’s emphasis on judicial discipline and State accountability. Binding declarations of law cannot be diluted through technical distinctions or successive notifications, and the State bears a constitutional obligation to give effect to judicial outcomes in both letter and spirit. Through the present case, the Supreme Court has reaffirmed that judicial discipline is the principle that turns hierarchy into harmony. Obedience to binding precedent is essential and even in those cases where a judge is unpersuaded, the lawful path would be to subject the binding precedent for reconsideration by a larger bench by recording reasons for the same. The maxim stare decisis et non quieta movere which means to stand by what is decided and not to disturb what is settled, is a working rule which ensures stability, predictability and respect for judicial outcomes.

The Supreme Court has also reaffirmed that adherence to judicial declarations by the State and cannot attempt to reassert them in an altered form. Adherence to judicial decisions by the State is a cornerstone of rule of law and constitutional discipline. The present judgement has strengthened the principle of rule of law by ruling that once a law is declared, it is incumbent upon the State thereafter to conform their conduct to the law so declared and that the State cannot attempt to circumvent the law based on altered notifications.

Viewed holistically, the decision is not merely about customs duty on electricity or SEZ policy, but a broader constitutional statement on the separation of powers, the rule of law, and the impermissibility of taxation by executive fiat.

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