The Supreme Court has upheld the Maharashtra government’s authority to withdraw or modify electricity duty exemptions granted to captive power generators, while directing that such withdrawal can take effect only after a reasonable one-year notice.

Background
The dispute arose from a long-standing policy of the Maharashtra government to promote captive power generation by industries. Beginning in 1994, the state granted exemptions from electricity duty for power generated and consumed by industries through captive power projects.

In 2000 and 2001, it issued fresh notifications that altered the regime. On April 1, 2000, the state enabled the levy of electricity duty across categories, while separately retaining a narrower exemption for certain non-conventional captive generation in the cooperative sector. On April 4, 2001, it granted only a partial exemption, limiting the benefit to units installed under the earlier policy to duty exceeding ₹0.15 (~$ 0.0016)/kWh.

Although the exemption was restored in 2005 with effect from May 1, 2005, it was not made applicable to the intervening period between April 1, 2000, and April 30, 2005. As a result, industries remained liable for the electricity duty for that period, leading to significant financial implications.

Captive power producers challenged the withdrawal before the Bombay High Court, which held that the state’s action was discriminatory, arbitrary, and lacked application of mind. It also noted that although the state had reviewed the issue in accordance with MERC, it had not consulted MERC before withdrawing the exemption and had rejected the producers’ representation without assigning reasons.

Before the Supreme Court, the state argued that the exemption was a matter of fiscal policy and not a vested legal right. It contended that the statutory power to grant an exemption inherently includes the power to withdraw or modify it, and that the decision was taken in the public interest to augment revenue and address budgetary constraints. The state also argued that the doctrines of promissory estoppel (a legal doctrine that enforces a promise even without a formal contract) and legitimate expectation were not applicable.

The captive power producers argued that they had made substantial investments based on the state’s policy assurances and that the withdrawal of exemption violated principles of fairness. They relied on promissory estoppel and legitimate expectation, asserting that the state could not arbitrarily reverse its position after inducing industrial investment.

Court’s Analysis

The Supreme Court examined the nature of exemptions granted under fiscal statutes and held that such exemptions are concessions rather than enforceable rights. It observed that beneficiaries of such concessions have only a limited right to enjoy them during the period they remain in force, and that this right is inherently subject to modification or withdrawal.

The Court held that the statutory power under which an exemption is granted also includes the authority to withdraw or modify it. It said there could be no assurance that such a concession would continue indefinitely, particularly in the context of fiscal policy.

It clarified that the government has the power to change policy in public interest. It held that public-interest considerations, such as fiscal stability, revenue augmentation, and budgetary constraints, could justify withdrawing exemptions.

In assessing whether the state’s decision was arbitrary, the Court found that the withdrawal was based on relevant considerations. It noted that electricity duty constitutes an important source of revenue and that the state must retain flexibility to recalibrate its policies to address fiscal constraints. The decision was therefore held to be neither arbitrary nor unreasonable.

At the same time, the Court held that fairness requires the withdrawal of a long-standing concession not to be abrupt, especially where industries have structured their commercial and financial affairs based on the earlier policy. Sudden withdrawal without a transition period would impose an immediate additional fiscal burden.

Balancing the state’s fiscal interests with the need for fairness, the Court ruled that a period of one year would be appropriate to allow industries to reorganize their operations and financial planning.

Accordingly, while setting aside the Bombay High Court’s judgments, the Supreme Court upheld the validity of the notifications dated April 1, 2000, and April 4, 2001. It directed that they would operate only after one year from their respective dates.

The state recently announced a 10-year electricity duty waiver for long-term captive green energy open-access projects supplying power within Maharashtra, integrated with energy storage, accounting for 50% of the renewable energy project’s capacity, and featuring at least 4 hours of discharge.

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