Legal Fiction vs Fiscal Reality: The Supreme Court's Decision on SEZ-DTA Power Supplies

Judicial clarity often emerges after years of statutory ambiguity, yet a landmark ruling can also create fresh uncertainties. The Supreme Court's (SC) judgment [TS-1-SC-2026-CUST] reflects this dynamic. While it settles the issue of whether customs duty could be imposed on electricity supplied from a Special Economic Zone (SEZ) to the Domestic Tariff Area (DTA) for the period up to 15 February 2016, it simultaneously raises interpretational questions for subsequent periods. This article unpacks the decision, situates it in the broader legal framework, and highlights the practical issues businesses must now navigate.

1. Setting the context - how we got here

Prior to 2009, electrical energy did not attract customs duty on import. Although Section 30 of the SEZ Act requires DTA clearances to bear duty as if imported, the absence of duty on imported electricity meant that, in practice, no customs duty was payable on electricity supplied from an SEZ to the DTA.

This position changed in 2010 when the Central Government imposed customs duty on electricity cleared from SEZ to DTA, retrospectively from 26 June 2009.

The duty framework continued to evolve. A significant shift occurred on 16 February 2016, when the blanket exemption on electricity imports was withdrawn and replaced with a country-specific exemption for imports from Nepal and Bhutan. As a result, electricity imported from other countries became subject to an effective Basic Customs Duty (BCD) of INR 1 per kWh for the period from 16 February 2016 to 30 June 2017.

In contrast, SEZ to DTA supplies attracted concessional effective rates ranging from Nil to INR 0.89 per kWh, depending on factors such as fuel type, plant capacity, and approval timelines for the SEZ power facility.

The blanket exemption on imports was later reinstated from 1 July 2017, only to be withdrawn again from 2 February 2020. At present, the tariff rate of BCD on imported electricity under the Customs Tariff Act, 1975 stands at INR 2 per kWh, while SEZ to DTA supplies continue to be subject to concessional effective rates in the range of Nil to INR 0.89 per kWh.

2. The Supreme Court's ruling - summary

The SC set aside the Gujarat High Court's 2019 decision [ADANI POWER LTD. Versus UNION OF INDIA - 2019 (6) TMI 1546 - GUJARAT HIGH COURT] and held that no customs duty was leviable on electricity generated in SEZ and supplied to the DTA for the period up to 15 February 2016.

The Court's reasoning centered on the absence of a valid charging event. It emphasized that:

• Section 12 of the Customs Act is the charging provision and applies only to goods imported into India. Clearance of electricity from SEZ to DTA does not constitute an 'import into India' and therefore cannot trigger the charge.

• Section 30 of the SEZ Act is not a charging provision. It merely ensures parity by requiring that SEZ to DTA clearances bear the same duty 'as leviable on such goods when imported.' It does not deem every such clearance to be an import for all purposes.

Accordingly, where imported electricity attracts no duty, the parity principle under Section 30 implies that no duty can be levied on SEZ-generated electricity.

On this basis, the SC declared the levy unlawful and directed refund of duties paid up to 15 February 2016. The Court did not examine the position from 16 February 2016 onwards, noting that the assessee's case for that period involved a nil rate.

While the ruling resolves the chargeability issue, it may have implications for other situations where SEZ to DTA movement is treated as an 'import' for limited purposes.

3. At what rate does duty apply now?

The withdrawal of the blanket exemption on electricity imports during 16 February 2016 to 30 June 2017 and from 2 February 2020 onwards gives rise to a key interpretational question: for SEZ to DTA clearances during these periods, should the applicable duty be the tariff rate on imports (currently INR 2 per kWh) or the concessional notified rates for SEZ supplies (Nil to INR 0.89 per kWh)?

Field authorities may rely on the SC's articulation of the parity principle under Section 30 to argue that SEZ to DTA clearances must bear the same duty as imports. On this view, if imported electricity (ignoring country-specific exemptions) attracts BCD of INR 2 per kWh, the same rate should apply to SEZ-generated electricity.

However, this interpretation may not align with Government intent, particularly where specific concessional rates for SEZ to DTA supplies have been prescribed through notifications.

Customs law routinely uses exemption notifications under Section 25 of the Customs Act to prescribe effective rates lower than the tariff rate. These notifications exempt goods from so much of the duty as exceeds a specified amount, thereby creating a lower effective rate.

Accordingly, it may be contended that, notwithstanding the higher tariff rate on imports, the Government is empowered to prescribe concessional effective rates for SEZ to DTA electricity supplies through such notifications.

4. Interplay with drawback provisions - a potential conflict

The present ruling may also impact the treatment of SEZ to DTA clearances in the context of drawback under Section 74 of the Customs Act, 1962. This provision allows drawback of duties paid on goods subsequently re-exported, subject to the condition that such goods are identifiable and were previously 'imported into India.'

Recently, vide Instruction No. 06/2026 - Customs dated 27 April 2026, the Central Board of Indirect Taxes and Customs (CBIC) clarified that, for trade and duty purposes, SEZ is treated as foreign territory within India. On this basis, movement of goods from SEZ into the DTA may be regarded as an import. Consequently, goods cleared into DTA on payment of duty and later re-exported by DTA may qualify as 'imported goods' for the purposes of drawback under Section 74.

However, the SC's ruling appears to depart from this framework. The Court has clearly held that clearance from SEZ to DTA does not constitute an 'import into India' for the purposes of Section 12 of the Customs Act. Instead, Section 30 of the SEZ Act was interpreted as a parity provision, requiring payment of duty as is applicable on imports, without deeming the transaction itself to be an import.

This creates a potential conflict. If SEZ to DTA clearances are not treated as imports in law, the basic condition for claiming drawback under Section 74 may be called into question, even though administrative guidance seeks to extend the benefit.

Conclusion

In essence, while the Supreme Court provides clarity on the pre-2016 position, it also highlights the challenge of applying tax provisions where legal concepts and practical realities do not fully align.

The Court's reasoning may extend to the period from 1 July 2017 to 1 February 2020. However, the intervening period from 16 February 2016 to 30 June 2017, as well as the post-2 February 2020 regime, characterized by higher import tariffs and concessional SEZ rates, presents a clear interpretational gap that neither the statute nor the judgment conclusively addresses.

Further, the ruling introduces additional complexity by potentially unsettling administrative positions that treat SEZ to DTA clearances as imports for specific benefits, such as drawback under Section 74 of the Customs Act. The divergence between the Court's interpretation and recent CBIC guidance highlights the limits of legal fictions when tested against the charging provision.

Until clearer legislative, administrative, or judicial guidance emerges, stakeholders must navigate this evolving position by carefully evaluating the interaction between Section 12,Section 30, and beneficial provisions such as drawback.

(The views expressed in this article are strictly personal.)