Customs Duty on clearance of Electricity from SEZ to DTA: Resolution of the Parity Battle by Supreme Court in Adani Power and the role of Union Budget 2026-27

The controversy surrounding the levy of customs duty on electrical energy supplied from Special Economic Zones (‘SEZ’) to the Domestic Tariff Area (‘DTA’) has resulted in more than a decade of litigation. While many assessees have been facing the issue, the case of Adani Power was dealt with primarily before the Courts. The aftermath of the legal battle led to significant reassertion of constitutional principles in taxation disputes.

Inception of the Controversy

Prior to 2007-08, no customs duty was leviable on import of electrical energy under Customs Tariff Item 2716 00 00 under the Customs Tariff Act, 1975 (‘Tariff Act’). This was introduced in 2008-09 exigible to customs duty amounting to Rs. 2000 per 100 kwh, however, was exempt in terms of Sr. No. 573 of Notification No. 21/2002-Cus. dated 01.03.2002.

The controversy began when Notification No. 25/2010‑Cus. dated 27.02.2010 retrospectively imposed 16% ad valorem duty on electrical energy generated in SEZ and cleared into DTA, while allowing exemption on electrical energy imported into India. The Assessee challenged the levy before the Gujarat High Court, arguing that electrical energy generated in SEZ and supplied to the DTA could not be subjected to customs duty. The Assessee contended that Section 30 of the SEZ Act, 2005 (‘SEZ Act’) does not permit such a levy owing to the fact that no customs duty was payable on comparable imports under Section 12 of the Customs Act, 1962 (‘Customs Act’) due to available exemptions. Additionally, the Assessee was also discharging customs duty on the consumables and raw materials required for generation of electrical energy which was supplied to DTA in terms of Rule 47(3) of the SEZ Rules, 2006 (‘SEZ Rules’). This led to a situation of double taxation.

The Gujarat High Court’s Landmark Judgment[1] affirmed by Hon’ble Supreme Court

The High Court held that Section 12 of the Customs Act applies exclusively to imports, not to electrical energy generated in India and supplied domestically. Notification issued under Section 25 of the Customs Act cannot create a new levy, when the essence of the provision is to extend benefits. Levying duty on electrical energy, after taxing its inputs under SEZ Rules, created double taxation. Retrospective imposition violated Article 265, while the structure of the levy violated Article 14 of the Constitution. Thus, the Court struck down the levy for 26.06.2009 to 15.09.2010, and the Supreme Court affirmed this outcome in 2016[2], finalising the legal position.

Second Round of Litigation- Extension of Controversy[3]

Two more notifications followed while the matter was pending, i.e., Notification No. 91/2010‑Cus. dated 16.09.2010, which introduced a specific rate of Rs. 0.10 per unit, and Notification No. 26/2012‑Cus. dated 18.04.2012 which further reduced this to Rs. 0.03 per unit.

The above however, was not decided in the favour of the Assessee on the grounds that the two Notifications were not specifically Impugned before the High Court. Further, Rule 47(3) of SEZ Rules was kept in abeyance, thus the argument of double taxation was not entertained.

Resolution of the Parity Battle by Supreme Court

Affirming the Gujarat High Court’s 2015 findings, the Supreme Court reiterated and upheld the underlying legal principles. The Court observed that, in light of the subsequent proceedings before the Gujarat High Court in 2019, which were a continuation of the 2015 matter, the Assessee was not required to challenge them separately, as the transaction and the legal position remained unchanged. The Supreme Court further clarified that its findings and conclusions were confined strictly to the period from 2010 to 2016.

Position after the period involved in Supreme Court Order

Although the dispute in Adani Power concerned the period from 2009 to 2016, the applicable duty rates changed significantly over time. Between 16.02.2016 and 29.06.2017, imports of electrical energy attracted customs duty of 100 paise per unit; this was reduced to a Nil rate from 30.06.2017 to 01.02.2020. During the same period, only SEZ‑based power plants with a capacity of 1000 MW enjoyed exemption, whereas other SEZ units did not (evident from Sr. No. 162, 163, 165 of Notification No. 50/2017-Cus. dated 30.06.2017). As a result, from 2017 to 2020, imported electrical energy was subject to Nil duty, but SEZ to DTA clearances, except those from 1000 MW plants, did not enjoy the same benefit, again leading to a situation of lack of parity.

After 02.02.2020, the exemption on the import of electrical energy into India was withdrawn, resulting in a customs duty of Rs. 2 per unit, on such imports. In contrast, Notification No. 50/2017-Cus superseded by 45/2025‑Cus. dated 24.10.2025 continued the Nil rate duty benefit for SEZ based power plants with a capacity of 1000 MW, allowing them to clear electrical energy into the DTA without payment of duty. This is subject to the condition that no exemption benefits are availed on inputs/ raw materials used for generation of electrical energy. However, this relief was available only until 31.03.2026. This led to industry‑wide concern regarding what the duty position would be, if the benefit was not extended beyond this date.

Ambiguity in the Industry

While the Supreme Court findings are constrained to a specific period of time, there is an industry-wide uncertainty about whether the ratio of the judgement extends to the present.

Role of Union Budget 2026-27

Resolving the apprehensions, the Union Budget has extended this benefit until 31.03.2028. As a result, SEZ based power plants with a capacity of 1000 MW may continue to clear electrical energy into the DTA at a Nil rate of customs duty under the same notification.

Take away from the SC Order

The ratio determined by the Courts will continue to apply for the period 2017-2020 in respect of electrical energy supplied from the Processing Area/ Non-Processing of an SEZ to DTA using specified inputs as well as SEZ based power plants with capacities below 1000 MW, as covered under Serial Nos. 162, 163, and 165 of Notification No. 50/2017‑Cus. dated 30.06.2017, respectively.

After 02.02.2020, the ratio ceases to be applicable because the import of electrical energy became dutiable following the withdrawal of the exemption. Currently as well, customs duty is leviable on the import of electrical energy into India, thereby ensuring parity. In this context, the extension of the exemption benefit to SEZ based power plants with capacities of 1000 MW and above, as proposed in the Union Budget, is a welcome development.

The Courts’ principles apply only where imported electrical energy is not subject to customs duty under Section 12 of the Customs Act, while on clearance from SEZ to DTA attract duty under Section 30 of the SEZ Act, resulting in fiscal disparity between the two.

[The authors are Executive Partner and Senior Associate, respectively in Customs practice at Lakshmikumaran & Sridharan, Mumbai]

[1] Adani Power Limited &1 v. Union of India, 2015 (11) TMI 1466 – Gujarat High Court.

[2] Union of India v. Adani Power Limited, 2016 (2) TMI 850 – SC Order.

[3] Adani Power Ltd. v. Union of India – 2019 (6) TMI 1546 – Gujarat High Court.