Free Trade Zone treatment for SEZ clearances sustained; demand for credit reversal and 8% payment was set aside.

Clearances made to units in Kandla Special Economic Zone were treated as clearances to a Free Trade Zone for the purpose of Rule 57AD(4) of the Central Excise Rules, 1944, because the Free Trade Zone and the Special Economic Zone occupied the same geographical area and the conversion was viewed as a change in designation, not substantive legal identity. As the charging provision and the notification defining the area came later, the Tribunal held that the clearances during the disputed period continued to receive Free Trade Zone treatment. The demand for non-reversal of credit and for payment of 8% of the value of exempted clearances was therefore unsustainable, and the demand, penalty, and consequential confirmations were set aside.

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Issues: Whether clearances made to units in Kandla Special Economic Zone during the relevant period were to be treated as clearances to a Free Trade Zone for the purpose of Rule 57AD(4) of the Central Excise Rules, 1944, and whether the demand of an amount equal to 8% of the value of exempted goods was sustainable.

Analysis: The relevant Free Trade Zone and Special Economic Zone occupied the same geographical area. The conversion of the area into a Special Economic Zone did not, by itself, alter its character for Central Excise purposes, particularly when the charging provision and the notification defining the area were brought in only later. The Tribunal treated the change as one of designation rather than of substantive legal identity, and held that the clearances during the disputed period continued to enjoy the treatment available to a Free Trade Zone. On that basis, the demand raised for non-reversal of credit and for payment of 8% of the value of exempted clearances could not be sustained.

Conclusion: The assessee was entitled to the benefit of Rule 57AD(4), and the demand, penalty, and consequential confirmations were set aside.

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