The government in August took a decision to tweak the rules relating to special economic zones that has enabled a company in the Adani Group to reap a bonanza of around Rs 500 crore. While a representative of the Adani Group predictably and correctly said that the company had done nothing wrong or illegal, top officials in the ministry of finance (including Finance Minister Arun Jaitley) and the ministry of industry and commerce ­(including Minister of State Nirmala ­Sitharaman who heads the ministry) did not respond to detailed questionnaires sent by the Economic and Political Weekly over a fortnight ago requesting them to explain the rationale for the government’s actions that apparently favour one particular firm. The Adani Group is headed by Gautam Adani, who is alleged to be close to Prime Minister Narendra Modi.

In August 2016, the Special Economic Zones Rules, 2016, were amended by the department of commerce to insert a provision on claims for refund under the Special Economic Zones Act, 2005. The SEZ Act under which the SEZ Rules are framed did not initially provide any provision for refunds of any kind before this amendment was introduced. The amendment allowed Adani Power Limited an opportunity to claim refunds on customs duty to the tune of Rs 500 crore. Adani Power Limited has claimed that it has paid customs duty on raw ­materials and consumables – that is, coal imported for the generation of electricity. However, documents leaked to the EPW clearly indicate that Adani Power Limited had not, in fact, paid the duty on raw materials and consumables amounting to approximately Rs 1,000 crore that had fallen due at the end of March 2015. It appears at face value that by amending the SEZ Rules to insert a provision for companies to claim refunds on customs duty, the department of commerce is ­allowing Adani Power Limited to claim refunds on the duty that has never been paid by it in the first place.

Adani Power Limited imports coal from Indonesia. The import of coal by the company (along with others such as Reliance ­Infrastructure, Rosa Power Supply, Essar Group firms among others) from Indonesia has been under the scanner of the ­Directorate of Revenue Intelligence for quite some time now. In March 2016, the directorate, an investigative wing of the ­department of revenue in the ministry of finance, claimed that coal imports from Indonesia were being over-invoiced in order to siphon off funds outside the country and that electricity generating companies, including Adani Power Limited, were benefitting from a higher tariff compensation based on the artificially inflated cost of the imported coal. In addition to this, firms in the Adani and Essar Groups have been accused of over-invoicing imported power plant equipment. These reports appeared for the first time in the EPW in April and May last year. This instance of alleged serial evasion of duties goes one step ahead to include demands for refunds for duty that, in fact, have not been paid.

Located in Mundra, Gujarat, Adani Power Limited claims it set up India’s first “super-critical technology” based coal-based thermal power plant with an installed capacity to generate 660 megawatts of electricity. The Mundra Power Plant, which is located within the Adani Port and Special Economic Zone, has a total capacity to generate 4,620 MW. The Mundra Power Plant
comprises nine separate units – four units of 330 MW capacity and five units of 660 MW capacity each. The Adani Port and Special Economic Zone is one of India’s largest operators of multiple power projects located in an area of around 15,000 hectares, within which an area of 6,456 ha has been “notified” as an Special Economic Zone or a “processing” area. The Adani Port and Special Economic Zone was earlier known as Mundra Port and Special Economic Zone Ltd ­until it changed its name on January 6, 2012. With an initial plan of setting up a power plant with a capacity of generating 1,320 MW, Adani Power Limited joined the larger project as a co-developer of the Mundra Power Plant, which now has a generating capacity of 4,620 MW.

Adani Mundra Port. Credit: Emperor Genius at English Wikipedia [CC BY-SA 3.0 ( or GFDL (], via Wikimedia Commons

Tweaking the rules

According to a senior official of the Adani Port and Special Economic Zone in Gujarat who spoke to the EPW on condition of anonymity, “Adani Power filed a refund application before the Development Commissioner of the APSEZ for a refund claim of Rs 506 crore.” He added, “The department of commerce am­e­nded rule 47 of the SEZ rules to facilitate this refund by empowering customs, ­excise and service tax officers to process this refund application.” The SEZ Rules, 2006, were amended by a notification dated August 5, 2016, by inserting Sub-Rule 5 in Rule 47 which read:

“Refund, Demand, Adjudication, Rev­i­ew and Appeal with regard to matters relating to ­authorised operations under Special Economic Zones Act, 2005, transactions, and goods and services related thereto, shall be made by the Jurisdictional Customs and Central Excise Auth­o­rities in accordance with the relevant provisions contained in the Customs Act, 1962, the Central Excise Act, 1944, and the Finance Act, 1994 and the rules made thereunder or the notifications ­issued ­thereunder.”

The refund application made by the Adani Power Limited is with respect to customs duty payable on raw materials, namely, coal and consumables under Rule 47(3) of the SEZ Rules. Adani Power Limited claims that it has paid the customs duty on coal it imported for power generation and therefore has the right to claim a refund on the duty paid since exemptions to paying duty are granted to companies and producers within a Special Economic Zone. Under Rule 47(3), customs duty is to be levied on consumables and raw materials – used in the generation of electricity and procured by producers within an Special Economic Zone – in case there is a transfer of electrical energy generated in such a plant outside the SEZ to the domestic tariff area.

This duty is levied when the conditions provided under Rule 47(3) are satisfied. In other words, under Rule 47(3) of the SEZ Rules, if the surplus power generated by a power producer (located within an Special Economic Zone) is transferred to the domestic tariff area, then the power plant is required to pay the customs duty on the consumables and raw materials, which were purchased duty free and used in the process of electricity generation. Therefore, Adani Power Limited is liable to pay duty on the raw material, namely, coal and other consumables, to the extent of the quantum used for the generation of electricity subsequently supplied to companies (public and private) within the domestic tariff area.

The fact of payment of duty on coal has been submitted by Adani Power Limited to the ­Gujarat High Court in the case Adani Power Limited v Union of India. However, according to documents received by the EPW from a reliable source, “There has been no tax paid on raw materials and other consumables, which is mandatory as per the SEZ law.” Adani Power Limited had availed of duty exemptions to the tune of Rs 1,000 crore on raw materials and other consumables till the end of March 2015 that have to be paid but had not been paid.

Exemptions to the SEZ Act

Exemptions to SEZ Act

A Special Economic Zone is a specific designated area in a country that has a set of legal and economic regulations that differ from other areas in the country. The purpose of implementing such a policy, and designating specific areas as special economic zones is to promote foreign direct investment. Companies that operate within these ­areas or zones receive tax incentives and benefits by, among other things, not having to pay taxes (including customs duty) at the regular prevailing rate.

The Customs Act, 1962, states that the government has the authority, keeping in mind the larger public interest, to ­“exempt generally either absolutely or subject to such conditions (to be fulfilled before or after clearance) specific goods from the total, or a part of the total amount, of customs duty that would normally accrue”. Section 26 of the SEZ Act, 2005, specifies the conditions under which a company is exempted from paying customs duty on goods and services that are imported or exported in and out of a special economic zone. However, Section 30 of the SEZ Act also authorises the Union government to levy customs duty on activities, goods and services that are removed from the special economic zone and transferred to the domestic tariff area.

According to the SEZ Act, any area outside the certified special economic zone is known as a domestic tariff area. Further, the SEZ Act and SEZ Rules clearly spell out the specific exemptions and tariff concessions that are extended in case the goods and services are sold or transferred from within the special economic zone to a company operating in the domestic tariff area. The Adani Group power plant procures coal mainly from Indonesia (after certain customs duty exemptions are realised) and generates electrical energy that is then sold to other units and companies operating in the special economic zone and to others outside the zone, namely, electricity transmission and distribution companies (or discoms), many of them owned by various state governments, some of which operate in the domestic tariff area.

Till February 2010, government regulations required power producing companies to pay customs duty on coal and other items consumed for the generation of electricity. With the introduction of customs notification 25/2010 on February 27, 2010, power producers that operated within special economic zones were required to pay the customs duty levied against the ­electricity sold to companies in the domestic tariff area initially at 16% ad valorem retrospectively with effect from June 26, 2009, which was ultimately reduced to a flat “basic” rate of three paise per unit or kilowatt hour (see Table 1). Can this duty of 3p per unit cover the duty foregone on coal and other inputs/consumables which was earlier recovered under rule 47(3) of the SEZ Rules? The answer is a clear “no”.

The other point to note in this context is that notification 9/2016 dated February 16, 2016, specified that the ­largest power plants in the country with ­installed capacities of more than 1,000 MW each that received formal approval for establishment in a special economic zone prior to February 27, 2009, were granted complete exemption from payment of duty. However, smaller power plants (with ­capacities of less than 1,000 MW each) continued to be taxed. Such a move seemed designed to benefit companies like Adani Power Limited.

Adani Power versus Union of India

Adani Power Limited filed a petition in the Gujarat High Court challenging the constitutionality and legality of customs notification No 25/2010. Through this notification, the government sought to levy customs duty against electrical energy removed from the special economic zone to the domestic tariff area and/or to “­non-processing” areas of the special economic zone at a rate of 16% ad valorem. This duty was to be charged retrospectively with effect from June 26, 2009.

The petitioner claimed that if duty is levied on the electrical energy transferred by Adani Power Limited’s power plant in the Mundra special economic zone to the various state discoms and private bodies in the domestic tariff area, then, under customs notification No 25/2010, this would amount to double taxation as the company is already liable to pay duty on raw materials and consumables under rule 47(3) of the SEZ Rules. Moreover, since the notification provided for levying duty retrospectively with effect from 26 June 2009, the petitioner (Adani Power Limited) was re­q­uired to pay customs duty for the period between June 26, 2009, and September 15, 2010, on the electricity sent to the domestic tariff area from the power plant within the special economic zone.

Frequent changes

The Union government, through a notification (No 21/2008-Customs) dated March 1, 2008, amended an earlier notification (21/2002-Customs) detailing that “electrical energy” when imported, would incur “nil” customs duty. In the 2002 notification, all goods used for the purpose of power generation were ­exempt from paying any additional duty while the standard rate of customs duty was ad valorem.

In 2010, through another notification (No 25/2010-Customs) dated February 27, 2010, the government clarified that the Customs Tariff Act exempted electrical energy, when imported into India, from payment of customs duty in its ­entirety. However, the government added a condition in this notification stating that the exemption would not be applicable if the electrical energy was rem­o­ved from the special economic zone and transferred to a domestic tariff area or transferred from a processing area of the special economic zone to a non-processing area within the same special economic zone. Thus, customs notification No 25/2010 clarified that if electrical ­energy was sold to a buyer in the domestic tariff area then customs duty would have to be paid. If the electrical energy were to be sold to a buyer outside the domestic tariff area, that is, to another unit or company in the same special economic zone or within another special economic zone or if it is exported to a foreign market, then the exemption to pay customs duty would continue.

However this policy did not last long. A month later, through the Finance Act, 2010, the government amended its customs tax policy again. The retrospective amendment, through clause 60, incre­ased the customs duty payable from zero to 16%. Given that the amendment of the act sought to implement a tax retrospectively, Adani Power Limited challenged this amendment in court on the grounds that it would be liable to pay customs duty of 16% on the electrical energy sold to the domestic tariff area. The government had rescinded customs notification 60/2010 dated May 10, 2010, and notification No 25/2010.

The government tried to correct the amendment in the Finance Act, 2010, through yet another customs notification (No 91/2010)7 dated September 6, 2010, which effectively exempt from payment of customs duty electrical energy when produced within an special economic zone and then transferred to the domestic tariff area or to the non processing area of the special economic zone – as long as certain conditions were met. The government sought to institute a case-specific or raw-material-source specific duty and tariff regime through customs notification No 91/2010.

Gujarat High Court judgment

Holding customs notification No 25/2010 dated February 27, 2010, to be ultra vires, violating Articles 14 and 265 of the Constitution of India, the Gujarat High Court set aside the notification. Ruling in favour of Adani Power Limited, the court believed that levying a 16% customs duty on the transfer of electrical energy from a special economic zone to the domestic tariff area amounted to taxing the petitioner doubly. The court stated:

“We find force in the contention of the ­petitioner that the petitioner should not be made liable to suffer double ­taxation, and the petitioner is made to pay the custom duty for the energy supplied then payment on duty of raw materials or any other duty on inputs should not be levied on the petitioner, and the duty paid by the petitioner on raw materials is liable to be refunded, as otherwise, the levy of duty on the power supplied to DTA from SEZ amounts to double ­taxation and it would be in violation of Article 265 of the Constitution of India.”

The retrospective imposition of customs duty was held to be illegal and ­arbitrary by the high court and the ­petitioner (Adani Power Limited) was thus entitled to ­customs duty exemption on electrical energy cleared to the domestic tariff area from the ­petitioner’s own power plant in the special economic zone for the period between June 26, 2009, and September 15, 2010.

No tax paid

According to a person familiar with the situation who spoke to the EPW on condition of anonymity, “There has been no tax paid on raw materials and other consumables, which is mandatory as per the SEZ law.” This person alleged that while Adani Power Limited submitted before the Gujarat High Court that the levy of customs duty for power supplied to the domestic tariff area from the special economic zone amounted to double taxation as Adani Power Limited had paid tax on raw materials and other consumables, “the fact was that taxes to the tune of more thanRs 1,000 crore have not been paid”.

Further, the person alleged that since “the SEZ authorities never collected tax on raw materials and consumables, the high court was misled and wrongly recorded that customs duty on electricity from the special economic zone to the domestic tariff area will not be maintainable as this will lead to double taxation”. An appeal against the verdict of the Gujarat High Court was dismissed by the Supreme Court on November 20, 2015. A review petition filed in the ­Supreme Court on 21 April 2016 was not entertained by the country’s apex court. Surprisingly, there was no citation of any evidence – in the Gujarat High Court judgement – produced by Adani Power Limited that ­substantiates its claim that it paid the requisite customs duty while importing coal. Curiously, no objection was raised by the Additional Solicitor General representing the Union of India.

Windfall gains?

According to data retrieved from the website of the Central Board of Excise and Customs, Adani Power Limited had three pending applications for refunds at the Mundra Commissionerate of the board. The first application (No 1172) dated August 11, 2016, sought a refund of Rs 487.75 crores. The second refund application (No 1174) dated August 12, 2016, demanded compensation of Rs 2.30 crores while the third refund application (No 1175) also dated August 12, 2016, sought a refund of Rs 84.37 lakhs. Therefore, the total refund claimed by Adani Power Limited from the Central Board of Excise and Customs (according to data available on August–September 2016) stood at Rs 490.89 crores.

However, the October 2016 “refunds” report downloaded from the Central Board of Excise and Customs website showed that while the applications numbered 1174 and 1175 remained the same, refund application 1172 that was made on August 11, 2016, claimed a drastically lower refund amount of Rs 27 crores (against Rs 487.75 crores earlier). Therefore, according to the October report, Adani Power Limited claimed a total refund of Rs 30.14 crores from the Central Board of Excise and Customs. None of the three applications were recorded in the refunds data found on the Central Board of Excise and Customs website for the months of November and December, nor does the board’s data point to any fresh ­refund applications made by Adani Power Limited. What happened to these applications by the Adani Group company? Were the refunds granted? We are not clear as officials in the ministry of finance did not respond to the questionnaires sent to them by the EPW.

We believe that the customs authorities are granting a Rs 500 crores refund to the Adani Power Limited although, at the same time, they have not collected duty worth Rs 1,000 crore from the company. A senior officer working in a Gujarat SEZ said, “There is no doubt about the fact that the raw materials and consumables are not eligible for any duty exemptions and this is evident from section 6(c) of the SEZ Act 2005 read with Rules 27(3) and 53 of the SEZ Rules, irrespective of any other obligations of the infrastructure developer.”

Further, the counsel for Adani Power Limited argued in court that the company had paid the tax on raw materials (coal) as evidence of the claim that the company was being subjected to double taxation. Over and above the statements made by Adani Power Limited’s lawyers, it is unclear from the Gujarat High Court judgment as to what evidence, if any, the court sought or was presented to it that led the judges to believe that Adani Power Limited had indeed made payments that it claimed it had.

On May 24, the EPW sent by email and by regular post detailed questionnaires to the following individuals: Finance Minister Arun Jaitley, Revenue Secretary Hasmukh Adhia, Director General (holding additional charge) of the Directorate of Revenue Intelligence Debi Prasad Dash, Principal Collector of Customs, Mundra Port and SEZ P V R Reddy, Minister of State for Commerce and Industry Nirmala Sitharaman and Commerce Secretary Rita Teaotia. No response had come from any of the government officials mentioned till the time of publication. As and when their responses come, these will be added to this article.

The same day, an email and a letter containing a questionnaire was sent to Gautam Adani, Chairman of the Adani Group. On June 10, a response was emailed by Jatin Jalundhwala, Chief ­Legal Officer, Adani Group, which read:

“...we would like to appraise/inform that Hon’ble Guj High Court in July 2015 held that no customs duty is payable on the electricity removed from SEZ to DTA. The said judgment was further affirmed by Hon’ble Supreme Court by dismissing the Civil Appeal and Review Petition filed by Union of India, vide Orders of Nov. 2015 and Apr. 2016 respectively. Thus, it has attained finality that no duty is payable on electricity removed from SEZ to DTA. We further would like to add that the APL’s power plant was approved prior to 27.02.2009 in processing area of SEZ. [The] SEZ Act provides for certain exemptions/concessions to developers. Accordingly, no duty/levy is payable on goods imported/procured in SEZ to carry on the authorised operations. Therefore, to our understanding, we are not required to pay any duty/levy on the goods imported/procured in SEZ. We hope that the above position clears your understanding on the subject. Therefore, we feel that no further information/details are required.”

This article first appeared on Economic and Political Weekly.