Tribunal quashes Customs duty, confiscation and penalties, reaffirming lack of Customs Act jurisdiction over SEZ unit gold removal

CESTAT Bangalore set aside the impugned order involving alleged clandestine removal of imported gold by a SEZ unit. Relying on consistent precedent, the Tribunal held that authorities exercising powers under the Customs Act lack jurisdiction over units operating within a SEZ for the purposes of raising such demands and imposing penalties. Consequently, all duty demands, confiscation orders, interest, and penalties imposed on the appellants were quashed. The appeals were allowed in toto, with the Tribunal reaffirming the jurisdictional bar against Customs authorities in the SEZ context.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether confiscation of 4 kgs. of gold lying at the Air Cargo Complex, imported for a SEZ unit, was legally sustainable under Sections 111(d), 111(o) and 120 of the Customs Act, 1962.

1.2 Whether officers under the Customs Act, 1962 had jurisdiction to initiate proceedings, adjudicate, demand duty and impose penalties in respect of a unit situated in a Special Economic Zone, in light of the SEZ Act, 2005 and Rules.

1.3 Consequence of lack of jurisdiction, if any, on the validity of the entire adjudication order including all demands of duty, confiscations and penalties against all noticees.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of confiscation of 4 kgs. of gold lying at Air Cargo Complex

Legal framework (as discussed)

2.1 The impugned order relied on Sections 111(d) and 111(o) of the Customs Act, 1962 to confiscate 4 kgs. of gold bars imported for the SEZ unit, on the premise that the import was not bona fide and that the gold was intended for clandestine diversion to DTA without payment of duty.

Interpretation and reasoning

2.2 The Tribunal noted that the 4 kgs. of gold were imported by a duly approved SEZ unit, that the goods were intercepted before reaching the unit and before being entered in its books, and that there was no allegation that, on the date of import, the unit lacked licence or authorisation to import.

2.3 The Tribunal recorded that the Development Commissioner's order cancelling the SEZ licence was dated much after the date of import; therefore, at the time of import, the unit was still a functioning SEZ unit.

2.4 The Tribunal observed that the adjudicating authority's conclusion-that the import could not be bona fide and that the only possible use was clandestine diversion-was based on assumptions and presumptions without contemporaneous evidence of actual diversion or illegal intent.

2.5 The Tribunal also noted that the unit's own statement indicated that, barring one power press machine which had been sold, the other machines remained available in the SEZ unit; thus, the assumption of non-functional status and inability to manufacture ornaments was not factually established.

2.6 The Tribunal held that there was no allegation in the show cause notice or in the order that the very act of import was in contravention of any specific legal provision that would render the goods liable to confiscation.

2.7 The Tribunal characterised the confiscation as contrary to basic principles of jurisprudence, including the presumption of innocence and fair trial, and as an instance of "calling the shots at a very early stage and in haste," amounting to abuse of process.

Conclusions

2.8 The confiscation of 4 kgs. of gold under Sections 111(d), 111(o) and 120 of the Customs Act, 1962 was held to be unsustainable in law and on facts and was set aside.

Issue 2: Jurisdiction of Customs authorities over SEZ units

Legal framework (as discussed)

2.9 The Tribunal examined the scheme of the SEZ Act, 2005, particularly Sections 21, 22, 51 and 53, and the SEZ Rules, 2006, in relation to the powers of Customs authorities under the Customs Act, 1962.

2.10 Section 51 provides that the provisions of the SEZ Act shall have effect notwithstanding anything inconsistent contained in any other law. Section 53(1) deems a Special Economic Zone to be territory outside the customs territory of India for the purposes of undertaking authorised operations.

2.11 The Tribunal noted that Chapter XA of the Customs Act earlier governed SEZs but, after the coming into force of the SEZ Act, 2005 and the issuance of notification under Section 52(1) of the SEZ Act, the provisions of Chapter XA were made inapplicable and there is no linking provision making Customs Act provisions generally applicable to SEZ operations.

2.12 The Tribunal also referred to SEZ Act provisions and Rules (including Sections 26, 30, 12, 21, 22, 27, 57 and related Rules) indicating that duty liability, recovery, monitoring and penal consequences for SEZ units are governed within the SEZ legal framework and by authorities constituted thereunder.

Conflicting precedents and interpretative approach

2.13 The Tribunal noted a line of CESTAT decisions holding that Customs authorities lacked jurisdiction inside SEZs, and contrasted these with another CESTAT decision following a contrary Gujarat High Court ruling.

2.14 The Tribunal identified two decisions of the same High Court: one holding that Customs authorities did not have jurisdiction over SEZ units, another subsequently holding that Customs authorities retained power to act under Sections 111-114 of the Customs Act even in relation to SEZ units.

2.15 Observing that the later High Court decision did not notice or reconcile the earlier one, and that both emanated from a High Court whose decisions the Tribunal must respect, the Tribunal declined to choose between their competing reasonings on merits.

2.16 Instead, the Tribunal treated the conflicting High Court decisions and divergent CESTAT views as creating sufficient ambiguity regarding the reach of Customs jurisdiction over SEZ units, particularly in matters of confiscation and penalty.

2.17 The Tribunal then applied the settled rule of interpretation that where two reasonable constructions of a taxing statute are possible, the one favourable to the assessee must be adopted. It relied on Supreme Court authority stating this principle, and noted its consistent application beyond penalty to interpretation of statutory provisions generally.

2.18 The Tribunal also cited a majority decision (including a Third Member) which held that after SEZ Act, 2005, duty demand and enforcement actions in relation to SEZ operations are to be undertaken under the SEZ Act and Rules by SEZ authorities; and that Customs officers lack jurisdiction to investigate and demand duty where operations are within the framework and approvals of SEZ authorities, absent consultation and action under the SEZ mechanism.

2.19 The Tribunal emphasised that the SEZ Act provides a complete and self-contained framework, including mechanisms for monitoring authorised operations, recovery of duties on improper utilisation or removal, and penal action, thus obviating the need for parallel or overlapping recourse under the Customs Act for the same SEZ-related conduct.

Conclusions

2.20 In light of the statutory scheme of the SEZ Act, the overriding clause in Section 51, the "deemed outside customs territory" provision in Section 53, the dedicated recovery and enforcement mechanisms under the SEZ framework, and the interpretative rule favouring the assessee where ambiguity exists, the Tribunal held that Customs authorities lacked jurisdiction to initiate, adjudicate and enforce proceedings against the SEZ unit and other appellants in respect of the transactions in question.

Issue 3: Effect of lack of jurisdiction on the adjudication order, demands and penalties

Interpretation and reasoning

2.21 Having held that the Customs authorities had no jurisdiction over the SEZ unit and the impugned activities, the Tribunal considered the impact of this finding on the entire adjudication order.

2.22 The Tribunal noted that the entire show cause notice and adjudication order, including all proposals for confiscation, demands of duty under Section 28 and imposition of penalties under Sections 112, 114A, 114AA and related provisions, were premised on proceedings initiated and conducted by Customs authorities asserting jurisdiction over an SEZ unit and connected parties.

2.23 The Tribunal observed that, once jurisdiction was found lacking, examination of the detailed merits of alleged shortages, diversions, telescoping of 50 kgs. of outsourced gold, statements under Section 108, and factual contradictions became unnecessary and inconsequential for decision.

2.24 The Tribunal nonetheless briefly recorded that there existed a permission letter on record allowing outsourcing of 50 kgs. of gold to a DTA unit, and that if such telescoping were considered, the alleged shortage of about 49 kgs. might not survive; but declined to adjudicate this aspect in view of its jurisdictional conclusion.

Conclusions

2.25 On the jurisdictional ground alone, the entire impugned order-including all confiscations, duty demands and penalties against all appellants-was set aside.

2.26 All appeals were allowed with consequential reliefs, if any, as permissible in law, without entering into or deciding the substantive merits of the allegations beyond what was necessary for the jurisdictional and 4 kgs. confiscation issues.

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