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

PART I

The judgment rendered by the Bombay High Court in the case of 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

establishes that penalties or interest on additional customs duty (CVD) and special additional duty of customs (SAD), or surcharges, which are not intrinsically linked to the basic customs duty, cannot be imposed without explicit substantive provision. In the aftermath of this judgment, the Revenue filed a Special Leave Petition (SLP) before the Honble Supreme Court, which was subsequently rejected on grounds of lack of merit. (UNION OF INDIA & ORS. VERSUS MAHINDRA AND MAHINDRA LTD. 2023 (8) TMI 135 - SC ORDER). Section 3(12) of the Customs Tariff Act has been substituted, vide Finance (No 2) Act 2024 which was notified on 16th August 2024, specifically including ‘interest, offences, penalties, recovery’ among others measures. Recently, Bombay HC vide Order dated 09.04.2025 in the case of 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, for the same reason has held that confiscation of goods and imposition of penalties /fine as bad in law and without authority of law in case related to IGST payment in contravention of a pre import condition. Kind attention is also invited to Para 25 of recent Apex Court decision 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 dealing with interpretation of taxing statutes. The relevant extract has been reproduced hereunder:-

“RULES REGARDING THE INTERPRETATION OF TAXING STATUTES

1. Regarding the interpretation of taxation statutes, the parties have relied on several decisions. The law laid down on this aspect is fairly well-settled. The principles governing the interpretation of the taxation statutes can be summarised as follows : -

   1. A taxing statute must be read as it is with no additions and no subtractions on the grounds of legislative intendment or otherwise;

   2. 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;

   3. While dealing with a taxing provision, the principle of strict interpretation should be applied;

   4. 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;

   5. In interpreting a taxing statute, equitable considerations are entirely out of place;

   6. A taxing provision cannot be interpreted on any presumption or assumption;

   7. 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;

   8. 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;

   9. 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;

   10. Equity and taxation are strangers. But if construction results in equity rather than injustice, such construction should be preferred;

   11. It is not a function of the Court in the fiscal arena to compel the Parliament to go further and do more;

   12. 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. It should be understood in its commercial sense. Unless defined in the statute itself, the words and expressions in a taxing statute have to be construed in the sense in which the persons dealing with them understand, that is, as per the trade understanding, commercial and technical practice and usage.” (emphasis added)

[Also see: Judgment of a nine-judge Bench of the Hon’ble Supreme Court in SUPERINTENDENT & LEGAL REMEMBRANCER, STATE OF WEST BENGAL Versus CORPORATION OF CALCUTTA - 1966 (12) TMI 67 - Supreme Court. In MARTIN BURN LTD Versus CORPN. OF CALCUTTA - 1965 (8) TMI 83 - Supreme Court, the Apex Court, observed as under:–

“A result flowing from a statutory provision is never an evil. A Court has no power to ignore that provision to relieve what it considers a distress resulting from its operation. A statute must of course be given effect to whether a Court likes the result or not.”

In this context, issues of levy of interest, recovery, offences, penalties, confiscation etc pertaining to DTA Clearances from SEZ Unit are examined in the following Paras.

II. Evolving legal landscape in respect of SEZ DTa transactions, anmely, goods removed from SEZ into DTA

Kind attention is invited to Section 30 of SEZ Act which deals with the Domestic Clearances. The same has been extracted below : -

Section 30. Domestic clearance by Units.

Subject to the conditions aapecified in the rules made by the Central Government in this behalf:-

1. any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975, where applicable, as leviable on such goods when imported; and

2. the rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.

From the perusal of Section 30 of the SEZ Act, it is clear that any goods removed from SEZ to DTA are chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 and the duty was leviable on such goods as treating them to be imported goods. Thus, if any goods is removed or supplied from SEZ to DTA, then custom duty was leviable on the goods treating them to be imported goods under the Customs Tariff Act, 1975 as per valuation applicable to such goods at the rate of duty and tariff valuation which was in force as on the date of removal and if the date is not certain, then on the date of payment of duty.

The expression 'import' had been defined in Section 2(23) of the Customs Act, 1962 as under :-

'2(23) 'import', with its grammatical variations and cognate expressions, means bringing into India from a place outside India;'

Section 2 (o) of the SEZ Act defines the expression 'import' which reads as under: -

'2(o) 'import' means –

1. bringing goods or receiving services, in a Special Economic Zone, by a Unit or Developer from a place outside India by land, sea or air or by any other mode, whether physical or otherwise; or
2. receiving goods, or services by a Unit or Developer from another Unit or Developer of the same Special Economic Zone or a different Special Economic Zone;'

Both the definitions of import if read in juxtaposition, then it is clear that under the Customs Act, if any goods are brought within the territory of India, then on it, customs duty shall be levied at such rate as may be specified under the Custom Tariff Act, 1975 under the law in force at that time on the goods imported into India, whereas under the SEZ Act, import is permissible within the SEZ by Unit or a Developer or receiving of goods or services by a Unit or a Developer from another Unit or Developer of the same SEZ or a different SEZ. But it would be treated as import.

The Customs Act was enacted by the Parliament under Entry 83 of List I of Schedule VII of the Constitution of India which provides 'Duties of customs including export duties'. Section 12 of the Customs Act is the charging section which provides for levy of customs duty on goods imported into India, which means, goods brought from a territory outside India into India. A conjoint reading of Entry 83 of List I of Schedule VII and Section 12 of the Customs Act shows that the levy under the said Act is on goods which are physically imported from territory outside India into India. On the other hand, duty under Section 30 of the SEZ Actis not on import of goods into India because the word 'import' as defined in the SEZ Act does not cover removal of goods from SEZ in DTA. Section 30 of the SEZ Act is a special provision which provides for levy of duty without any specific name thereto. Section 30 is a legislation by legislative reference in as much as it seeks to adopt and borrow the provisions of the Customs Tariff Act for the purpose of quantification of the duty levied there under. In calculating the duty liability under Section 30, the rate of duty as specified in Customs Tariff Act has to be read with Notifications of the said Act for the time being in force in relation to the goods sought to be removed from SEZ into DTA.

By virtue of Entry 83 of List I of Schedule VII to the Constitution of India, the said Act has been enacted to provide for levy of customs duty on goods imported into India. The word 'import' in the context of Entry 83 of List I means bringing into India from a territory outside India. This is also the scope and ambit of the charging section. The customs duty under Section 12 of the Customs Act read with Section 83 of the List I can only be levied on goods imported into India.

Duty on goods removed from SEZ into 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 is distinct from SEZ import transaction. Goods imported into SEZ are exempted by virtue of Section 26 of the SEZ Act. Goods cleared from SEZ into DTA are subject to chargeability of duties of Customs as per Section 30 of SEZ Act, 2005. Section 30 is a legislation by legislative reference in as much as it seeks to adopt and borrow the provisions of the Customs Tariff Act for the purpose of quantification of the duty levied there under. In calculating the duty liability under Section 30, the rate of duty as specified in Customs Tariff Act has to be read with other Notifications for the time being in force in relation to the goods sought to be removed from SEZ into DTA.

It may be noted that although the SEZ Statute provides for chargeability of duty but is silent on issues like recovery, refund, offence, penalty, confiscation, imposition of fine etc. It is legislation by legislative reference or incorporation which provides for chargeability of certain duties but provisions like recovery, refund, offence, penalty, confiscation, imposition of fine, interest, assessment etc, are conspicuously absent. It may be noted that Section 30 of SEZ Act doesnot provides for imposition of penalty, interest, confiscation, recovery etc in respect of chargeable duty. Therefore, there is no power under the provisions of law to impose penalty or interest or confiscation or order recovery. It may be noted that though Statute is silent on these aspects, certain aspects find mention in SEZ Rules, 2006. Rule 47 has been extracted below for reference: -

Rule 47. Sales in Domestic Tariff Area.-

(1) A Unit may sell goods and services including rejects or wastes or scraps or remnants or broken diamonds or byproducts arising during the manufacturing process or in connection therewith, in the Domestic Tariff Area on payment of Customs duties under section 30, subject to the following conditions, namely.-

(a) Domestic Tariff Area sale under sub-rule (1), of goods manufactured by a Unit shall be on submission of import licence, as applicable to the import of similar goods into India, under the provisions of the Foreign Trade Policy:

Provided that goods imported or procured from the Domestic Tariff Area and sold as such without being subjected to any manufacturing process shall be subject to the provisions of the Foreign Trade Policy as applicable to import of similar goods into India.

1. ****.

2. ****

3. *****

Valuation and assessment of the goods cleared into Domestic Tariff Area shall be made in accordance with Customs Act and rules made there under.

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 there under or the notifications issued there under.

It must be noted that the Section 30 of SEZ Act read with Rule 47 which are indeed legislation by reference are silent on issues like interest, penalty, offences, confiscation, recovery, fine etc.

It must be noted SEZ DTA transaction is distinct taxable event. Goods are removed as per Section 30 of SEZ Act read with Rule 47 of SEZ Rules. Infact, they are not even assessed by proper officer in the rank of DC/AC as stipulated in Customs Act. Recovery proceedings, Confiscation proceedings and imposition of fine/penalty cannot be done in thin air as per Custom Act without any clear legal backing/incorporation of such provisions of Customs Act in SEZ Act or Rules by legislative reference. Only limited provisions of assessment and valuation have been borrowed. Provisions of confiscation, fine, penalties, recovery, recover etc are conspicuously missing. It may be noted that duty on supplies from DTA to SEZ is being charged as per Section 30 of SEZ Act and not as Section 12 of Custom Act. The law laid down by Constitutional Courts is clear on subject matter. A conjoint reading of Section 12(1) with Sections 2(18),2(23) and 2(27) of the Customs Act, 1962 makes it clear that customs duty can be levied only on goods imported into or exported beyond the territorial waters of India. Since both the SEZ unit and the DTA unit are located within the territorial waters of India, Section 12(1) of the Customs Act 1962 (which is the charging section for levy of customs duty) is not attracted on goods removed from SEZ into DTA. Plain reading makes it clear that Section 30 of SEZ Act read with Rule 47 is an act of incorporation in rules in respect of levy/collection of duty on such transactions.

More than a decade back, challenge to the levy and collection of customs duty on goods moved from various places in India (outside SEZs) into SEZs were made before various constitutional Courts. It was argued that customs duties, being export duties, should only apply to goods exported out of India, as per Section 12 of the Customs Act, 1962. It was contested that the collection of customs duty on certain products supplied from DTAs to SEZs based on mere circular issued by Department of Commerce is legally unsustainable. The courts agreed to such contention that the duties of customs could only be levied on goods exported to a place outside India. The court found that such circular mandating payment of duties on supplies to SEZ was not sustainable in law, as it imposed duties contrary to the provisions of the SEZ Act, 2005 and Customs Act, 1962. The court examined the different definitions of 'export' under both the SEZ Act, 2005 and the Customs Act, 1962. It had been concluded that the definition of 'export' in Section 2(18) of the Customs Act, 1962, applies only to goods taken out of India to a place outside India. Therefore, the term 'export' as defined in the SEZ Act, 2005, cannot be used to levy customs duties on goods supplied from DTAs to SEZs. The court also analyzed the legislative competence to impose customs duties on goods supplied to SEZs. It held that the Parliament did not intend to levy customs duties on such goods, as evidenced by the SEZ Act, 2005. The court also emphasized that customs duties are meant for goods entering or leaving the country, not for intra-country transactions. Therefore, imposing such duties on goods supplied to SEZs would be beyond the legislative competence of the Parliament and contrary to the Constitution of India. The court concluded that the levy of customs duties on goods supplied from DTAs to SEZs was not permissible under the then existing legal framework and such circulars mandating collection of custom duty on SEZ supplies were declared as deemed illegal and without authority.

It is submitted that sufficient jurisprudence is available on the subject matter.

Certain notable judgments are as under : -

• UNION OF INDIA VERSUS ESSAR STEEL LTD. - 2010 (7) TMI 992 - SC ORDER
• Essar Steel Ltd. Versus Union Of India - 2009 (11) TMI 141 - Gujarat High Court
• M/s Adani Power Limited & 1 Versus Union of India Through Secretary MoF 2015 (11) TMI 1466 - GUJARAT HIGH COURT
• UNION OF INDIA VERSUS ADANI POWER LIMITED - 2016 (2) TMI 850 - SC ORDER
• Advait Steel Rolling Mills Pvt. Ltd. Versus Union Of India - 2013 (8) TMI 33 - MADRAS HIGH COURT
• Commissioner Of C. Ex., Bangalore Versus Biocon Ltd. - 2011 (2) TMI 460 - Karnataka High Court
• Shyamaraju & Co. (India) Pvt. Ltd. Versus Union Of India - 2010 (7) TMI 290 - Karnataka High Court

Infact, till recently, goods were removed from SEZ into DTA based on verification of documents by Authorized Officer on SEZ_Online System administered by NSDL. Documents are not verified by the proper officer of rank of DC/AC as stipulated in Customs Act rather by Authorized officer of rank of Appraiser deputed to Zone. NSDL has issued SEZ_Online Manuals for ease of trade and authorized officers for numerous transactions like Import, Export, DTA. DTA procurement, Job Work, Intra Zone, Inter SEZ transactions etc. In many cases, even basic document like Bill of Entry is not filed and goods are released based on Challans by the Developer or Unit. In many SEZs, even Appraisers are executing Bonds as a matter of practice despite no reference of substantive provision for recovery such as Section 142 of Customs Act,1962 in SEZ statute. Neither, reassessment is being done by officer of rank of DC/AC of Customs nor Speaking orders under Section 17(5) of Customs Act,1962 are being issued by Specified Officer. Even after implementation of EDI projects in SEZ, DTA transactions are not being assessed as per Custom Act since the reassessment proceedings pursuant to rejection of transaction value/ speaking orders etc are not being issued by Specified Officer. ln exercise of the powers conferred by section 157 read with sections 46 and 47 of the Customs Act, 1962, Bill of Entry (Electronic Declaration) Regulations,1995 were notified and same were superseded by Bill of Entry (Electronic Integrated Declaration) Regulations, 2011 and subsequently by Bill of Entry (Electronic Integrated Declaration and Paperless Processing) Regulations, 2018. It is a matter of record that systemic changes and updates in format of Bill of Entry/declaration were carried out in EDI by Customs formations. Seldom changes were made in SEZ_Online System meant for SEZ units in line with paperless declaration/ processing in CBIC formations. Non integration of SEZ_Online system in Single window project has also resulted into many non-compliances of non-tariff nature like those of AQIS, FSSAI, BIS, PQIS, CDSCO etc. Non issuance of reassessment order/ Speaking order by Specified Officer as per Customs Act, 1962 still plagues DTA transactions in many SEZs even as we celebrate 20 years of implementation of SEZ Statute.

PART II.... to continue .....