Government directive on SEZ power plant re-demarcation set aside as arbitrary and invalid

Karnataka HC set aside government communication dated 6.4.2015 regarding SEZ power plant operations. The court found the directive requiring re-demarcation of processing areas to non-processing areas for captive power plants was arbitrary and repugnant to accompanying guidelines. Following Delhi HC precedent in Moser Baer India Ltd case, the court held that denying operation and maintenance benefits under Section 26 of SEZ Act for the period 01.04.2015 to 08.05.2016 was invalid. The impugned order was set aside and petition allowed.

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Issues Involved:
1. Whether the operation and maintenance benefits under Section 26 of the SEZ Act could be denied for the intervening period from 01.04.2015 to 08.05.2016.
2. The validity of the 2015 communication that re-demarcated power plants in processing areas as non-processing areas and denied benefits.

Detailed Analysis:

Issue 1: Denial of Operation and Maintenance Benefits from 01.04.2015 to 08.05.2016

The petitioners, Manyata Promoters Pvt. Ltd. (MPPL) and Vikas Telecom Pvt. Ltd. (VTPL), were developers of SEZs and had set up power generation units within the processing areas of their respective SEZs. Initially, under the 2009 Guidelines, these units were entitled to fiscal benefits under Section 26 of the SEZ Act. This practice continued under the 2012 Guidelines. However, the 2015 communication withdrew the 2012 Guidelines and restored the 2009 Guidelines but re-demarcated power plants in processing areas as non-processing areas, thereby denying operation and maintenance benefits.

The petitioners argued that the denial of benefits for the period from 01.04.2015 to 08.05.2016 was unjustified. They cited judgments from the Delhi High Court in Moser Baer India Ltd. v. Union of India and the Madras High Court in DLF Utilities v. Union of India, which held that the benefits for the interim period could not be taken away by the 2015 communication. The courts emphasized that the exemption and benefits under Section 26(2) of the SEZ Act could not be overridden by a mere communication.

The court noted that the 2015 communication restored the 2009 Guidelines, which did not provide for re-demarcating power plants in processing areas as non-processing areas. The letters of approval granted to the petitioners had authorized operations that were never treated as unauthorized under any Guidelines.

Issue 2: Validity of the 2015 Communication

The 2015 communication was issued in two letters. The first letter restored the 2009 Guidelines without indicating any intention to retract benefits. The second letter, however, directed the demarcation of power plants in processing areas as non-processing areas, which contradicted the first letter. The court found this contradiction to be an apparent error.

The 2016 Guidelines later clarified that power generation units in SEZs would be treated as units within the processing area and entitled to fiscal benefits. This indicated no intention to take away benefits during the interim period.

Judgment:

1. The petitions were allowed.
2. The impugned orders dated 28.12.2015 were quashed.
3. The respondent No. 1 was directed to issue a fresh letter of approval granting approval to the petitioners' captive backup power plants as SEZ units with effect from 01.04.2015.
4. The respondent No. 1 or any authorized person was directed to make appropriate endorsements on the pending ARE-1 forms for the supply of HSD to the petitioners for the period from 01.04.2015 to 08.05.2016, stating that the HSD had been admitted in full in the SEZs. This exercise was to be concluded within three months from the date of receipt of the certified copy of the order.

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