SEZ goods destroyed in accidental fire cannot attract customs duty absent unauthorised use or failure to account

Goods admitted into a special economic zone are treated as outside the customs territory for customs purposes, and the SEZ framework overrides inconsistent Customs Act provisions. Rule 8 of the SEZ Rules, 2003 permits duty demand only where goods are used for unauthorised operations or where there is failure to account for them. Here, the raw materials were destroyed in an accidental fire, with no finding of misuse, diversion, or mala fide removal. The shortage was explained by the fire incident, so the loss did not attract Rule 8 or justify duty demand under the Customs Act. The customs demand was therefore unsustainable.

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Issues: Whether customs duty could be demanded on duty-free imported raw materials lying in a special economic zone when the goods were destroyed by an accidental fire, and whether such loss attracted Rule 8 of the SEZ Rules, 2003 or Section 23 of the Customs Act, 1962.

Analysis: The statutory scheme treats goods admitted into a special economic zone as outside the customs territory for customs purposes, while the SEZ provisions override inconsistent provisions of the Customs Act. Rule 8 of the SEZ Rules, 2003 authorises duty demand where goods are used for unauthorised operations or where there is failure to account for the goods. The destruction in the present case was by accidental fire, with no finding of misuse, diversion, or mala fide removal of the goods. Such accidental loss is not equivalent to use for unauthorised operations, and the shortage stood explained by the fire incident. The legal fiction attached to the SEZ status was required to be given full effect, and in the absence of a breach covered by Rule 8, the goods remained within the deemed foreign territory of the SEZ. In that situation, customs duty could not be fastened on the destroyed goods.

Conclusion: The duty demand was unsustainable and the assessee was entitled to relief.

Ratio Decidendi: Where goods admitted into an SEZ are accidentally destroyed and the event does not fall within the statutory grounds of unauthorised use or failure to account for goods, customs duty cannot be demanded merely by treating the loss as clearance for home consumption.

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