SEZ warehoused capital goods not liable to domestic sales tax before customs clearance; detention proceedings were unsustainable.

Capital goods imported into a Special Economic Zone and retained under bond in a customs warehouse were treated as part of a duty-free enclave and, until crossing the customs frontiers for home consumption, were not subject to sales tax under the CST or KGST regimes. The Special Economic Zones framework and the Export-Import Policy recognised the zone as a distinct statutory territory for trade operations, duties and tariffs, with the SEZ Act, 2005 giving overriding effect. On that basis, detention and sales tax proceedings at the pre-clearance stage were unsustainable, and the amount deposited for release was directed to be refunded.

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Issues: Whether capital goods imported into a Special Economic Zone and kept under bond in a customs warehouse could be detained and subjected to sales tax liability under the Central Sales Tax Act and the Kerala General Sales Tax Act before they crossed the customs frontiers of India.

Analysis: The unit was established in a Special Economic Zone and had imported machinery for use as capital goods. The goods were retained under bond with the Customs authorities and, under the Export-Import Policy, capital goods in an SEZ could be transferred to another SEZ unit with prior permission. A Special Economic Zone is treated as a duty-free enclave and deemed to be foreign territory for trade operations, duties and tariffs. The legal consequence is that goods in such warehoused condition do not attract domestic sales tax until they cross the customs frontiers and are cleared for home consumption. The Special Economic Zones Act, 2005 also gives overriding effect to this statutory regime.

Conclusion: The goods were not liable to sales tax under the CST or KGST regime at the stage of detention. The impugned proceedings were unsustainable and were set aside, and the amount deposited for release was directed to be refunded.

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