Accidental destruction of duty-free SEZ goods by fire does not amount to unauthorised use or unaccounted shortage.

Accidental destruction of duty-free goods in a Special Economic Zone by fire, where the incident is promptly reported and the shortage is explained, does not amount to unauthorised use or failure to account for the goods under the SEZ Rules. The customs duty foregone cannot be recovered on the footing that the goods were not put to intended authorised use when there is no evidence of removal or deliberate misuse. The applicable SEZ and customs procedure framework permits recovery only where duty-free goods are used for unauthorised operations or remain unaccounted for, and a fire accident does not meet that test.

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Issues: Whether customs duty foregone was recoverable on goods imported into a Special Economic Zone unit when the goods were destroyed in an accidental fire, and whether such destruction amounted to unauthorized use or failure to account for the goods under the SEZ Rules.

Analysis: The goods were admittedly lying in the SEZ unit's premises and were destroyed in a fire accident, which was also reported to the departmental officers. The demand was founded on the view that the goods had not been put to the intended authorised use and that remission under Section 23 of the Customs Act, 1962 was unavailable. The Tribunal held that the governing SEZ framework, particularly Rule 8 of the Special Economic Zone Rules, 2003 and the corresponding customs procedure provisions, contemplates duty liability where duty-free goods are used for unauthorised operations or are not accounted for. Accidental destruction by fire is not deliberate misuse and does not amount to unauthorized use. It also cannot be treated as failure to account for the goods when the shortage is explained by the fire incident and no contrary evidence shows removal elsewhere.

Conclusion: The demand of customs duty foregone was not sustainable and the issue was decided in favour of the assessee.

Ratio Decidendi: Accidental destruction of duty-free SEZ goods by fire, when promptly accounted for, does not constitute unauthorized use or failure to account for goods under the SEZ Rules so as to justify recovery of customs duty foregone.

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