Part II Recovery, Offences and Penal provisions in case of SEZ DTA Clearances

Recovery, Offences and Penal provisions in case of SEZ DTA Clearances

Part II to continue

It may be noted that the amended SEZ Rules provides for the Refund, Demand, Adjudication, Review and Appeal with regard to SEZ DTA transactions shall be made by the Jurisdictional Customs Authorities in accordance with the relevant provisions contained in the Customs Act,1962 and the rules made thereunder or the notifications issued thereunder. It may be noted that issue of refund has been settled by legislation by reference. Section 27 of Customs Act,1962 deals with Claim for refund of duty and amended Rule 47 provides that jurisdictional Custom authorities will process the same. Erstwhile SECTION 28 provided for “Notice for payment of duties, interest etc” and same was amended in 2011 with wordings like “Recover of duties not levied or not paid or short-levied or short-paid or erroneously refunded”. Whereas amended Rule 47 provides for word “DEMAND”, words like “NOTICE or RECOVER” are conspicuously missing and need not be assumed or presumed. It may be noted that the amended SEZ Rules are silent on issues like recovery /section 142, offence/section 132, penalty/section 114, 114AA, 117, 115, confiscation/Section 113, imposition of fine/Section 125 etc. It is not even legislation by legislative reference but just incorporation in rules which provides for reference to another statute for limited purpose. However, provisions like recovery of sums due to govt, fine, offence, penalty, confiscation, interest etc, are conspicuously absent. It may be further noted that the duty on goods supplied from SEZ to DTA is not being levied under the Customs Act on account of the legislative mandate under Entry 83 of List 1 of Schedule VII to the Constitution of India. SEZ DTA transaction meant for removal of goods from SEZ to DTA are distinct taxable event vis-a-vis SEZ Import transaction meant for taking goods from outside India into SEZs in India. It  may be noted that SEZ Act doesn’t provides for imposition of penalty, interest, confiscation etc in respect of duty chargeable under Section 30 of SEZ Act. Therefore, there appears to be no power under the provisions of law to impose penalty or interest or confiscation or execute attachment related to recovery proceedings.

When a statute levies a tax it does so by inserting a charging section by which a liability is created or fixed and then proceeds to provide the machinery to make the liability effective. It, therefore, provides the machinery for the assessment of the liability already fixed by the charging section, and then provides the mode for the recovery and collection of tax, including penal provisions meant to deal with defaulters. Provision is also made for charging interest on delayed payments, etc. Ordinarily the charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. As held by the Apex Court in the matter of Birla Cement Works & JK. Synthetics Ltd. Versus Commercial Taxes Officer and State of Rajasthan - 1994 (5) TMI 233 - Supreme Court, any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as a Substantive law and not adjectival law. The same is also applicable for imposition of penalty or fine or confiscation or recovery too.

Section 28AB of the Customs Act, 1962 is a taxing provision which creates and fastens the liability on a party. The provision has to be strictly construed and will be governed by the language employed in the section. The Apex Court in the matter of India Carbon Ltd. Versus State of Assam (and other appeals) - 1997 (7) TMI 566 - Supreme Court, after quoting paragraph 16 of J.K. Synthetics Ltd. (Supra), held that the proposition that may be derived from J.K. Synthetics Ltd. (Supra) is interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf. The Court held that where there is no substantive provision requiring the payment of interest, the authorities cannot, for the purpose of collecting and enforcing payment of tax, charge interest thereon.

It must be noted that such provision for levy of interest is absent in Section 30 of SEZ Act or even Rule 47. Likewise, there is no substantive provision in SEZ Act for imposition of penalty or fine or confiscation or recovery of duty in case of non levy or short levy arising out of removal of goods from SEZ into DTA. It remains a fact that only substantive provision for chargeability has been created in statute. Only limited aspects of Valuation, assessment, refund, appeal, adjudication, demand etc have been incorporated by reference in Rules through Notification only and not even through legislation by reference in Statute. Without substantive statutory provision for confiscation, penalty, fine, bank attachments, recovery proceedings like attachment in statute, issuance of Recovery Notice and Adjudication proceedings are likely to be questioned.

Customs Act provides for adjudication of penalties and confiscation. What is the use of adjudication order if there is no substantive provision in statute or rules for confiscation and penalties. Customs Act provides for issuance of Notice for non-levy and short levy. What is the use of demand notices if there is no substantive provision in statute or rules for recovery to be carried out as per Section 142 of Customs Act. It is on record that for almost a decade, from period 2006 to 2016, on one hand SEZ Unit Holders were made to run from pillar to post for getting refunds because jurisdictional authorities used to reject refund claim citing no provisions in SEZ Rules to deal with such issues. On the other hand, many Notices were issues by agencies for imposition of penalties and fines despite no provision for the same. In many cases, even Development Commissioner used to issue SCN for recovery of Custom duties, Excise duties and penalties under Customs and Excise Acts. After set of decisions by higher judiciary, SEZ rules were amended to reign in little clarity on the issue of refund to SEZ Units. However, recent orders by Higher Courts like UNION OF INDIA& ORS. Versus MAHINDRA AND MAHINDRA LTD. 2023 (8) TMI 135 - SC Order, A.R. Sulphonates Private Limited Versus Union of India, Commissioner of Customs (Adjudication) Mumbai, Commissioner of Customs, (Import-I), Mumbai, Commissioner of Customs, Gujarat, Commissioner of Customs, Kandla, The Deputy Commissioner of State Tax, Kalyan. - 2025 (4) TMI 578 - BOMBAY HIGH COURT and recent amendment in CTA vide Finance Act, 2024, highlight the need for amendment in SEZ Act/rules.

Kind attention is invited to A.R. Sulphonates Private Limited Versus Union of India, Commissioner of Customs (Adjudication) Mumbai, Commissioner of Customs, (Import-I), Mumbai, Commissioner of Customs, Gujarat, Commissioner of Customs, Kandla, The Deputy Commissioner of State Tax, Kalyan. - 2025 (4) TMI 578 - BOMBAY HIGH COURT  examines the issue at length. Section 3 (12) of the Tariff Act, prior to its amendment by Finance (No. 2) Act, 2024 dated 16th August, 2024, reads as under:-

“(12):-The provisions of the Customs Act, 1962 (52 of 1962) and the rules and regulations made thereunder, including those relating to drawbacks, refunds

and exemption from duties shall, so far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to the duties leviable under that Act.”

Court noted that the Section 3 (12) of the Tariff Act, prior to its amendment, did not make applicable the provisions of the Customs Act relating to interest, offences and penalties to integrated tax chargeable under Section 3 (7) of the Tariff Act. Court also noted that issues of interest, fine and penalties are no longer resintegra in light of decision of Bombay High Court in Mahindra & Mahindra Ltd. (Automotive Sector), Versus The Union of India, The Settlement Commission, Additional Bench, Customs & Central Excise, Mumbai, The Commissioner of Customs (Import), Mumbai, The Additional Director General, DGCEI, Mumbai - 2022 (10) TMI 212 - BOMBAY HIGH COURT, as confirmed by the Hon’ble Supreme Court in its Order in UNION OF INDIA& ORS. Versus MAHINDRA AND MAHINDRA LTD. 2023 (8) TMI 135 - SC Order,, by which the SLP against the Judgement of this Court was dismissed. Even the Review Petition filed by Revenue was dismissed by the Hon’ble Supreme Court by an Order dated 9th January, 2024. After the passing of the said Order dated 1st August, 2024,by Finance Act (No. 2) of 2024, Section 3 (12) of the Tariff Act was amended prospectively with effect from 16th August, 2024, to interalia include the applicability of interest, recovery, offences and penalty provisions of the Customs Act to the Tariff Act.. The new sub-section is reproduced below : -

'(12) The provisions of the Customs Act, 1962 and all rules and regulations made thereunder, including but not limited to those relating to the date for determination of rate of duty, assessment, non-levy, short-levy, refunds, exemptions, interest, recovery, appeals, offences and penalties shall, as far as may be, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to duties leviable under thatAct or all rules or regulations made thereunder, as the case may be.'.

The Hon’ble Bombay HC in the Final Order dated 09.04.2025 in the case A.R. Sulphonates Private Limited Versus Union of India, Commissioner of Customs (Adjudication) Mumbai, Commissioner of Customs, (Import-I), Mumbai, Commissioner of Customs, Gujarat, Commissioner of Customs, Kandla, The Deputy Commissioner of State Tax, Kalyan. - 2025 (4) TMI 578 - BOMBAY HIGH COURT noted that“ as already held by us on the basis of the Judgement of the Hon’ble Supreme Court in the case of Orient Fabrics Limited, Section 3 (12) of the Tariff Act, after its amendment by Finance (No. 2) Act, 2024, dated 16th August, 2024, makes applicable the provisions relating to interest, offences and penalties of the Customs Act to the Tariff Act. As already held by us, Section 3(12) of the Tariff Act, as amended, is applicable only after 16th August,2024 and is not applicable to the present case.”

In case of Birla Cement Works & JK. Synthetics Ltd. Versus Commercial Taxes Officer and State of Rajasthan - 1994 (5) TMI 233 - Supreme Court the Hon’ble Apex Court has held that interest can be levied and charged on delayed payment of tax only if the statute that levies and charges the tax makes a substantive provision in this behalf.

In the case reported in COLLECTOR OF C. EX., AHMEDABAD Versus ORIENT FABRICS PVT. LTD. - 2003 (11) TMI 75 - Supreme Court the Hon’ble Supreme Court has also referred to an amendment made in year 1994 by inserting the expression “offences and penalties” in Section 3 (3) of the Additional Duties Act and held that such amendment was required to remedy the defect contained in the unamended provisions. In absence of specific insertion of words like offences, penalties and interest, such levies could not be assumed and such additional tax cannot be charged.

Similar views have also been taken by Tribunal in the context of CVD/SAD in the case of M/s. Acer India (Pvt.) Ltd. Versus Commissioner of Customs (Audit), Chennai - 2024 (5) TMI 478 - CESTAT CHENNAI where it has been held that it is settled that in the absence of specific provision relating to levy of Interest, Redemption Fine and Penalty in respective legislation for levy duty, the same cannot be demanded or imposed or recovered by taking recourse to machinery provisions relating to recovery of the duty. Therefore, the orders for recovery of “Interest, Redemption Fine and Penalty” in these cases are not sustainable considering charging provisions of the Customs Act 1962 and relevant provisions under the Customs Tariff Act, 1975 and the decisions rendered thereon as mentioned above. The issue on imposing Interest, Redemption Fine and Penalty is no longer ResIntegra. Similar view has also been taken by Tribunals in the context of IGST in the cases such as Chiripal Poly Films Ltd. Versus Commissioner of Customs-Customs Ahmedabad - 2024 (9) TMI 940 - CESTAT AHMEDABAD and M/S. FLEXTRONICS TECHNOLOGY INDIA PVT. LTD. VERSUS COMMISSIONER OF CUSTOMS, CHENNAI VII COMMISSIONERATE - 2025 (3) TMI 695 - CESTAT CHENNAI

In the case of ADVAIT STEEL ROLLING MILLS PVT. LTD. Versus UNION OF INDIA - 2013 (8) TMI 33 - MADRAS HIGH COURT, HC held that“ As such it is clear that it would not be open to the respondents to levy duties of customs on such goods, by way of Notifications or Circulars.”. It is submitted that same applies for issues like interest, penalties, fine, bank attachments, recovery proceedings like attachment of assets etc. The same cannot be imposed based on assumption or presumption or purported intendment. It may be noted that in the SEZ Rules, 2006 in rule 47, after sub-rule (4), the sub-rule (5) pertaining to Refund, Demand, Adjudication, Review and Appeal has been inserted vide vide Notification No. G.S.R.772(E) dated 05-08-2016, w.e.f. 05-08-2016 only.

Substantive statutory provisions for short-levy, refunds, exemptions, interest, recovery, offences and penalties etc are conspicuously absent. Absence of clear provisions clearly contradicts principles laid down by highest Court in the case of Chief Commissioner of Central Goods and Service Tax & Ors. Versus M/s Safari Retreats Private Ltd. & Ors. - 2024 (10) TMI 286 - Supreme Court, namely, a taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise; If the language of a taxing provision is plain, the consequence of giving effect to it may lead to some absurd result is not a factor to be considered when interpreting the provisions. It is for the legislature to step in and remove the absurdity; While dealing with a taxing provision, the principle of strict interpretation should be applied;If two interpretations of a statutory provision are possible, the Court ordinarily would interpret the provision in favour of a taxpayer and against the revenue; A taxing provision cannot be interpreted on any presumption or assumption; A taxing statute has to be interpreted in the light of what is clearly expressed. The Court cannot imply anything which is not expressed. Moreover, the Court cannot import provisions in the statute to supply any deficiency; There is nothing unjust in the taxpayer escaping if the letter of the law fails to catch him on account of the legislature’s failure to express itself clearly; If literal interpretation is manifestly unjust, which produces a result not intended by the legislature, only in such a case can the Court modify the language; When a word used in a taxing statute is to be construed and has not been specifically defined, it should not be interpreted in accordance with its definition in another statute that does not deal with a cognate subject.

CONCLUSION

Let us sharpen the discussion a little more. It is also mandated that there cannot be imposition of any tax without the authority of law. Such a law has to be unambiguous and should prescribe the liability to pay taxes in clear terms. If the concerned provision of the taxing statute is ambiguous and vague and is susceptible to two interpretations, the interpretation which favours the subjects, as against there the revenue, has to be preferred. This is a well-established principle of statutory interpretation, to help finding out as to whether particular category of assesses are to pay a particular tax or not. Tax laws or creation of tax liabilities are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax. Without multiplying decisions from Constitutional Courts, as Lord Cairns said many years ago in Partington v. Attorney- General[(1869)LR 4HL 100]:'AsI understand the principle of all fiscal legislation it is this : If the person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free, however apparently within the spirit of the law the case might otherwise appear to be.”

It may be noted that the legislature of largest democracy is fully aware of 3 concepts:-

(i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; and (iii) clarificatory amendments which are retrospective in nature. Issues emanating from absence of substantive provisions in CTA, 1975 has already been resolved by Finance Act, 2024. However, necessary amendments in SEZ Act/Rules are yet to carried out by legislature to reign in clarity to SEZ units and tax payers.

It is on record that Parliament of India representing the largest democratic electorate in the world vide Finance Act, 2024, has now incorporated substantive provisions for “‘interest, penalty, offences, recovery, non-levy, short levy’ into the Customs Tariff Act, 1975. The same can be invoked only after the substitution of the said sub-section as discussed above, from 16.08.2024 only and not on the goods which were imported/cleared into DTA before that date. The issue has been settled in catena of decisions by the higher Courts.

In view of above, it appears that necessary amendments in SEZ Act in line of amendment to CTA 1975 by Finance (No.2) Act, 2024 dated16th August, 2024 should be brought at earliest. SEZ Act and rules should make it clear that the “The provisions of the Customs Act, 1962 and the rules and regulations made thereunder, including but not limited to those relating to assessment, non-levy, short-levy, refunds, exemptions, interest, recovery, appeals, offences and penalties shall, as far as maybe, apply to the duty or tax or cess, as the case may be, chargeable under this section as they apply in relation to duties leviable under that Act or all rules or regulations made thereunder, as the case may be.'.

Customs Act provides for adjudication of penalties and confiscation. What is the use of adjudication order if there is no substantive provision in statute or rules for confiscation and penalties. Customs Act provides for issuance of Notice for non levy and short levy. What is the use of demand notices if there is no substantive provision for recovery in statute for goods removed from SEZ into DTA. In absence of any substantive provision in statute for aspects like interest, offence, penalty/fine, recovery by means of attachment of property etc; law declared by Constitutional Courts and recent legislative enactments, the very survival of various Notices will remain in question. Such proceedings involving recovery by means of attachment of property, interest, fine and penalty may not stand judicial scrutiny. The very proceedings may at the most be termed as nothing but as one without jurisdiction, without the authority of law and perse illegal ab initio in event of glaring absence of any substantive provision in statute book. Tax statute has to be clear, explicit and unambiguous. Cost of unwarranted litigation and the financial burden needs to be avoided.