Sound on Import, Silent on Export, and Dangerous in the Gap

CBIC Instruction 06/2026-Customs: .

On 27th April 2026, the Central Board of Indirect Taxes and Customs (CBIC) issued Instruction No. 06/2026-Customs from the Drawback Division, seeking to resolve a long-standing divergence in the processing of Section 74 drawback claims filed by Domestic Tariff Area (DTA) units. The immediate trigger was Audit Para 5.8 of Audit Report No. 33 of 2025, which found that field formations were applying inconsistent standards when goods cleared from a Special Economic Zone (SEZ) and subsequently re-exported to the DTA. Some formations had denied drawback on the basis that SEZ-to-DTA movement was not an 'import' in the conventional sense.

CBIC's answer: It is. Relying on the foreign territory principle embedded in the SEZ Act, 2005 and the duty levy mechanism under Section 30 of that Act, the instruction clarifies that DTA clearances from an SEZ unit, made on payment of applicable customs duty, constitute 'imports' for the purposes of Section 74 drawback. On this basis, the instruction holds that Section 74 drawback is available when such goods are subsequently re-exported.

The clarification of the import side is sound and welcome. The instruction correctly applies settled principles of SEZ law. The problem is that it stops there. It does not examine the other half of the Section 74 equation, namely, what constitutes a valid 're-export' for drawback purposes, and whether a supply from the DTA back to an SEZ unit satisfies the definition of 'export' applicable to Section 74. In failing to address this, the instruction creates a dangerous gap: it implies that drawback is available in a wider range of transactions than the law actually permits, and it will expose DTA units and the department alike to litigation that could have been avoided.

2. What the Instruction Says and Why

Section 74 of the Customs Act, 1962, provides for the refund of customs duty (called 'drawback') when goods that were previously imported into India and on which duty was paid are subsequently re-exported. The Section rests on a simple principle of economic equity: if goods entered the country, bore the incidence of customs duty, but were never actually consumed in the domestic economy, the importer should not have to bear the full cost of that duty permanently.

Instruction 06/2026 addresses the question of whether goods cleared from an SEZ to the DTA satisfy the 'previously imported' condition. It does so by invoking two provisions:

1. Section 30 of the SEZ Act, 2005, stipulates that removal of goods from an SEZ into the DTA attracts customs duties (including anti-dumping, countervailing, and safeguard duties) as applicable under the Customs Tariff Act, 1975, at rates in force on the date of removal.

2. The foundational principle that an SEZ is treated as foreign territory relative to the DTA. Movement of goods from foreign territory (the SEZ) into the DTA is therefore equivalent to a cross-border import, attracting the same duty structure and the same statutory consequences.

On this basis, the instruction concludes that goods cleared from an SEZ to the DTA on payment of applicable duties are to be treated as 'imported goods' for Section 74 drawback purposes. When such goods are re-exported, the drawback claim should be processed and disbursed.

This analysis of the import leg is correct. The error lies in what the instruction omits.

3. Section 74 Drawback: The Basics for a Non-Specialist Reader

Before examining the legal gap, it helps to understand Section 74 in plain terms. Imagine you are a trading company in Mumbai. You import a consignment of high-precision measuring instruments from Germany and pay Rs. 18 lakhs in customs duty at the time of importation. A few months later, your original customer cancels the order, and you find a new buyer in Singapore. You export the instruments to Singapore.

The customs duty you paid on importation was calculated on the assumption that the goods would enter the Indian economy. Since they never did, Section 74 allows you to claim back up to 98% of that duty (subject to conditions and time limits). This is the drawback: a refund mechanism that prevents permanent duty incidence on goods that do not actually remain in India.

For Section 74, the drawback to apply, five conditions must be met:

1. The goods must have been imported into India.

2. Customs duty must have been paid at the time of importation.

3. The goods must be capable of being easily identified as the same goods that were imported.

4. The goods must be re-exported within the prescribed time limit

5. The goods must be exported in accordance with the applicable drawback rules.

The CBIC instruction addresses condition (a): it confirms that SEZ-to-DTA clearance constitutes an import on the ground that the SEZ is a territory outside India. It says nothing about condition (e): what constitutes a valid export, and whether all forms of onward movement qualify. This silence is where the trouble begins.

4. The Critical Gap: Two Different Definitions of 'Export'

Indian customs law does not use a single, universal definition of 'export' across all its provisions. The term appears in different contexts with different meanings, and the distinction between those meanings is central to understanding why the CBIC instruction is incomplete.

4.1 Export under the Customs Act, 1962 (Governing Section 74)

Section 2(18) of the Customs Act, 1962, defines 'export' as 'taking out of India to a place outside India.' This is a physical, territorial definition. For goods to be 'exported' under the Customs Act, they must cross the customs frontier and move from Indian territory to a foreign country. The goods must physically depart India.

An SEZ, though treated as foreign territory for the limited purpose of duty levy, is physically located within the geographic boundaries of India. Goods moved from the DTA to an SEZ do not leave India; they move from one part of the Indian landmass to another. Under the Customs Act's core definition, this does not constitute 'taking out of India to a place outside India.'

For Section 74 drawback, the applicable rules and the parent statute use 'export' in this narrow, physical sense. Re-export, for Section 74 purposes, means the goods must actually leave India, through a port, an airport, or a land customs station, destined for a foreign country. The definition for the term, 'export' under the Re-export of Imported Goods (Drawback of Customs Duties) Rules, 1995, significantly does not include supplies from DTA to SEZ.

4.2 Export under the SEZ Act, 2005 and the Section 75 Framework

The position is quite different for Section 75 drawback. Section 75 provides drawback on goods that are manufactured in India and exported, as an incentive for domestic production.. The Customs and Central Excise Duties Drawback Rules, 2017 specifically includes supplies from DTA to SEZ within the definition of the term, exports'.

This restricted definition in the Drawback Rules under Section 74 ibid and the expanded definition under the Drawback Rules under Section 75 ibid reflect a deliberate policy choice: the government wanted to incentivize DTA manufacturers to supply goods to SEZ units as if those supplies were exports, and it extended the drawback benefit accordingly.

This expansion was done expressly, through a statutory definition . The benefit does not arise by implication or inference; it arises because Parliament said so.

4.3 Why the Distinction Matters

The difference between these two definitions creates a clear, significant gap that the CBIC instruction ignores:

For Section 75 drawback and the Rules: Supply from DTA to SEZ = 'Export' (explicitly included by statute). Drawback is available.

For Section 74 drawback and the Rules: Supply from DTA to SEZ = NOT 'Export' (no statutory inclusion). Drawback is not available for such supplies.

The CBIC instruction, by confirming the import leg (SEZ-to-DTA = import) without addressing this limitation on the export leg, implies to the reader that a drawback is available in a transaction chain of SEZ-to-DTA followed by DTA-to-SEZ. It could be argued that if SEZ could be regarded as a territory outside India for the import leg, it cannot be a territory of India for the export leg. But while the Customs Act, 1962 and the Drawback rules issued under Section 74 do not support this position, it should also be noted that the Drawback is governed by the Customs Act and not the SEZ Act. . The instruction has set up the import condition correctly, but left the export condition in limbo, and that omission carries real consequences.

5. Two Scenarios: Where the Instruction Works and Where It Fails

Scenario A: The Straightforward Case (Instruction Correctly Applies)

XYZ Trading Company, a DTA unit in Mumbai, purchases a consignment of optical instruments from a manufacturing unit in the SEEPZ SEZ. The goods are cleared from the SEZ to XYZ's warehouse on payment of applicable customs duty. Six months later, XYZ secures a buyer in Japan and exports the instruments from Nhava Sheva port to Osaka, Japan.

Here, the complete Section 74 drawback chain is intact. The goods entered the DTA from the SEZ on payment of duty (import condition, per the instruction). The goods then physically leave India and travel to Japan (export condition, per the Customs Act's definition). XYZ files a valid Section 74 drawback claim, and it should be processed. The instruction applies correctly and usefully.

Scenario B: The Problem Case (Where the Instruction Misleads)

ABC Components Limited, another DTA unit, purchases electronic sub-assemblies from an SEZ unit in the MEPZ Special Economic Zone in Chennai. Customs duty is paid on DTA clearance. ABC subsequently finds it cannot use these sub-assemblies in its domestic operations and decides to transfer them to a buyer who is a unit in a different SEZ, say the Krishnapatnam Port-based SEZ in Andhra Pradesh.

ABC's finance team, reading the CBIC instruction, reasons as follows: the goods were 'imported' (SEZ to DTA, confirmed by the instruction), and they are now being 're-exported' (DTA to SEZ, since the SEZ is treated as foreign territory). Drawback should be available under Section 74.

The logic seems plausible on the surface. But it runs into a direct legal barrier. The goods are not leaving India; they are moving from one point in India to another point that happens to be designated as an SEZ. The Customs Act's definition of 'export' requires goods to be 'taken out of India to a place outside India.' That condition is not satisfied. Unlike Section 75, the Section 74 framework has no provision extending 'export' to cover supply to an SEZ developer or unit.

ABC's drawback claim is not legally sustainable. The instruction does not cure this deficiency because instructions cannot override the statute or the rules. ABC would face rejection of the claim or, worse, recovery of disbursed drawback with interest and penalty, having filed in good faith based on an incomplete instruction.

Scenario C: The Middle Ground (Goods Re-exported Abroad After Temporary DTA Sojourn, Fully Valid)

PQR Logistics, a DTA freight forwarder, receives goods from an SEZ unit for onward export abroad. Customs duty is paid on DTA clearance. PQR loads the goods on a vessel bound for Dubai and obtains a Let Export Order from the customs officer at the port. The goods leave Indian customs territory.

This is a clean Section 74 case: import (SEZ to DTA, per the instruction), then physical export out of India (DTA to Dubai, per the Customs Act). Drawback should be processed without difficulty. The instruction adds clarity and removes the prior field-level ambiguity. This is its proper domain of operation.

6. Why an Instruction Cannot Fill the Statutory Gap

It might be argued that the CBIC instruction, being an expression of the department's authoritative view, should be followed by field formations and accepted by adjudicating authorities. This argument misunderstands the constitutional and legal status of administrative instructions in the Indian taxation framework.

CBIC instructions are issued under the administrative authority of the Board. They can clarify ambiguous provisions, align divergent field practices, and communicate policy positions. They are not statutory instruments. They derive their force from the fact that they correctly interpret the underlying statute and rules; they carry no independent legal authority.

Courts have consistently held that where a circular or instruction takes a position that is inconsistent with or unsupported by the parent statute or the rules framed under it, the statute and the rules prevail. The instruction must yield. This principle has been applied repeatedly in customs drawback matters, classification disputes, valuation cases, and refund proceedings.

The position here is not merely that the instruction is ambiguous. The position is that the Drawback Rules under Section 74 ibid,, as they stand, do not include DTA-to-SEZ supply within the definition of 'export' for Section 74 drawback purposes. The instruction, by its silence on this point, allows a reader to assume that such supply qualifies. That assumption is wrong. When a court tests the claim, it will look at the rules. It will find no statutory basis for treating DTA-to-SEZ supply as a re-export for Section 74 purposes. It will not be diverted by the instruction.

The consequence is predictable: drawback claims filed on the basis of the incorrect assumption will be rejected or recovered. The instruction will be set aside to the extent it implies broader coverage than the rules support.

7. What a Complete Instruction Would Have Looked Like

A more complete and legally accurate instruction would have addressed both legs of the Section 74 equation. On the import side, it would have confirmed exactly what Instruction 06/2026 confirms: SEZ-to-DTA clearance on payment of duty constitutes an import for Section 74 purposes. On the export side, it would have stated clearly that:

1. Section 74 drawback is available only when the goods are re-exported in the sense of being physically taken out of India to a place outside India, through a customs port, airport, or land customs station.

2. Supply of goods from the DTA to an SEZ unit, though the SEZ is treated as foreign territory for the purposes of authorized operations of the SEZ unit, does not constitute 're-export' for Section 74 drawback purposes. The definition of 'export' applicable to Section 74 does not include DTA-to-SEZ supply.

3. DTA units wishing to claim drawback on goods received from an SEZ must ensure that the goods actually leave India as part of a genuine export transaction, and that a shipping bill or bill of export evidencing physical departure is available.

Alternatively, if the policy intent was to extend Section 74 drawback coverage to DTA-to-SEZ supplies (which would have been a legitimate policy choice, mirroring the Section 75 position), the correct instrument would have been an amendment to the definition of the term, export' under the Re-export of Imported Goods (Drawback of Customs Duties) Rules, 1995 specifically incorporating DTA-to-SEZ supply within the definition of 'export' for Section 74 purposes. That is a rule amendment, and it requires the rulemaking process and an instruction cannot substitute for it.

8. Recommendations

In light of the foregoing, the following steps are recommended:

1. CBIC should issue a corrigendum or supplementary clarification to Instruction 06/2026 specifying that the drawback benefit confirmed by the instruction applies to transactions where goods cleared from an SEZ to the DTA are subsequently exported out of India to a place outside India in the conventional customs sense, and not to transactions where goods are merely transferred from the DTA to another SEZ unit.

2. If the Board's policy intention is to extend Section 74 drawback to DTA-to-SEZ supplies as well, the appropriate course is a formal amendment to the Re-export of Imported Goods (Drawback of Customs Duties) Rules, 1995, explicitly including such supplies within the definition of 'export' for Section 74 purposes.

3. Field formations should, in the interim, process Section 74 drawback claims on SEZ-origin goods only where there is clear evidence of physical export out of India, supported by a shipping bill or equivalent export document. Claims based on DTA-to-SEZ transfers should be held pending further clarification.

4. DTA units that have already filed drawback claims on DTA-to-SEZ transactions relying on the instruction should seek independent legal advice and consider filing protective submissions clarifying the basis of the claim, to limit exposure in the event of a recovery audit.

9. Conclusion

Instruction 06/2026-Customs addresses a genuine problem. The divergence in field practices around Section 74 drawback for SEZ-origin goods was causing real difficulties for DTA units and inconsistent outcomes across formations. CBIC's decision to intervene is correct, and its analysis of the import leg (SEZ-to-DTA = import) is legally sound.

However, a good answer to half a question is not the same as a sound legal clarification. By addressing the import condition without equally addressing the export condition, and by failing to draw the critical distinction between the narrow definition of 'export' applicable to Section 74 and the broader definition expressly applicable to Section 75, the instruction risks generating the very kind of inconsistency and litigation it was issued to prevent.

The courts will not defer to an administrative instruction that overreaches the rules. They will look at the statute, read the rules, and apply the law. DTA units that rely on this instruction for transactions beyond its proper scope will find themselves without the legal protection they believed they had.

CBIC would do well to supplement this instruction promptly, drawing the boundaries clearly, and if expansion of coverage is desired, to initiate the proper rulemaking process. Until then, caution is the wiser counsel for all involved.

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By Dr. Joshua Ebenezer, Principal Consultant (NuCov FaciliTrade)