Customs Commissioner lacks jurisdiction over SEZ gold seizure; Section 111(o), 112, 114AA, Rule 47 held inapplicable

CESTAT (Allahabad) resolved the earlier difference of opinion by accepting the view of the Member (Judicial) that alleged irregularities regarding invalid LOA and non-maintenance of records by SEZ Unit (Appellant No.1) fall within the exclusive jurisdiction of the Development Commissioner under the SEZ Act and SEZ Rules. It held that the Commissioner of Customs, Noida, lacked jurisdiction to invoke Section 111(o) of the Customs Act for absolute confiscation of the seized gold or to impose penalties under Sections 112(a), 112(b) and 114AA. Rule 47 of the SEZ Rules, concerning DTA sales, was found inapplicable. The Member (Technical)'s contrary view was rejected, and the matter was placed before the Regular Division Bench to record the majority view accordingly.

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1. ISSUES PRESENTED AND CONSIDERED

1.1 Whether the Commissioner of Customs had jurisdiction, under the Customs Act, 1962 read with the Special Economic Zones Act, 2005 and SEZ Rules, 2006, to investigate, issue show cause notice and adjudicate confiscation and penalty proceedings in respect of gold found within a Special Economic Zone unit, where the alleged contraventions related to expiry of Letter of Approval and intra-SEZ job work.

1.2 Whether Section 111(o) of the Customs Act, 1962 was correctly invoked to order absolute confiscation of gold seized from an SEZ unit when the goods were legally imported into the SEZ by another unit and there was no allegation of illegal import into India or removal/attempted removal from SEZ to Domestic Tariff Area.

1.3 Whether penalties imposed under Sections 112(a), 112(b) and 114AA of the Customs Act, 1962 on the SEZ unit, its partner and the partner of the supplying SEZ unit were legally sustainable in the facts established on record.

1.4 Whether intra-SEZ sub-contracting/job work and issues arising from expiry of Letter of Approval and non-maintenance of records in an SEZ unit fall within the exclusive domain of the SEZ authorities (Development Commissioner/Special Officer) or can be the subject of Customs adjudication invoking confiscation and penalty provisions.

1.5 Whether the authenticity of the job-work voucher covering the seized gold and the ownership of that gold by the supplying SEZ unit were correctly appreciated by the Adjudicating Authority.

1.6 Consequent to the above, whether the order of absolute confiscation and penalties should be set aside and the appeals allowed, or the impugned order sustained; and how the difference of opinion between the Members was to be resolved.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Jurisdiction of Commissioner of Customs over SEZ-related contraventions

Legal framework discussed

2.1 The Tribunal examined Sections 21, 22, 51, 52, 53 and 55 of the SEZ Act, 2005; Rule 47(5), Rules 36, 41, 42 and 47 of the SEZ Rules, 2006; and Notifications S.O. 2665(E), 2666(E), 2667(E) dated 05.08.2016 and G.S.R. 772(E) dated 05.08.2016. Circular No. 11/2017-Cus dated 31.03.2017 was also considered. Section 111 of the Customs Act, 1962 was a notified offence under S.O. 2665(E), and jurisdictional Customs Commissioners were notified as enforcement officers under S.O. 2667(E) for notified offences in SEZs.

2.2 The Circular and Rule 47(5) were noted as dealing with "Refund, Demand, Adjudication, Review and Appeal" in respect of "sales in DTA" (Rule 47), i.e. removal of goods from SEZ to Domestic Tariff Area.

Interpretation and reasoning (majority view)

2.3 The majority (original Member Judicial and Third Member) held that Rule 47 and Circular No. 11/2017-Cus are confined to situations involving removal/sale of goods from SEZ to DTA, and adjudication of demands and related disputes arising therefrom. In the present case, there was no allegation that the seized gold was being, or was attempted to be, removed from SEZ to DTA; thus Rule 47(5) and the Circular did not confer adjudicatory jurisdiction on the Commissioner for the present dispute.

2.4 Sections 21 and 22 of the SEZ Act were interpreted to mean that Customs officers can act as "enforcement officers" only in relation to "notified offences" under the SEZ Act framework, i.e. where there is a proper invocation of a notified Customs offence (such as Section 111) in a context fitting the Customs scheme. Where the core issues relate solely to SEZ-specific conditions (validity of LOA, intra-SEZ job work/sub-contracting, and maintenance of SEZ records), such matters remain within the domain of the Development Commissioner/Special Officer under Sections 15, 16 and Rules 41, 42 and 35 of the SEZ Rules.

2.5 The majority found that the facts established that: (i) the gold had been lawfully imported into the SEZ by another SEZ unit; (ii) no allegation was made that the goods were illegally imported into India or that there was any removal/attempted removal to DTA; and (iii) the alleged contraventions concerned operation of an SEZ unit without a valid LOA and lack of record-keeping. These matters were characterised as SEZ Act/SEZ Rules issues, not as Customs import/export offences.

2.6 The majority thus held that invoking Section 111(o) of the Customs Act in these facts was itself legally untenable; consequently, the reliance on S.O. 2665(E)/2667(E) to clothe the Commissioner with jurisdiction for investigation, seizure, show cause and adjudication was misconceived.

Reasoning (dissenting view)

2.7 The dissenting Member (Technical) read Notifications S.O. 2665(E), 2666(E), 2667(E) and Rule 47(5) as conferring general jurisdiction on the jurisdictional Commissioner of Customs to investigate and adjudicate notified offences under Section 111 of the Customs Act in SEZs, subject to intimation to the Development Commissioner. He relied on the statutory notifications and High Court precedents to hold that Customs authorities were competent to proceed, treating the SEZ as a "deemed port" and the receipt of gold by a unit without valid LOA and documentation as an "illegal import" into SEZ.

Conclusion on Issue 1

2.8 By majority, the Tribunal held that, in the absence of any allegation of illegal import into India or removal to DTA, and where the core issues related to LOA validity and intra-SEZ job work, the Commissioner of Customs, Noida could not validly invoke Section 111(o) to assume jurisdiction. The matters fell within the jurisdiction of SEZ authorities, and the Customs adjudication could not be sustained on the basis of Rule 47(5) or the SEZ notifications relied upon.

Issue 2 - Applicability of Section 111(o) of the Customs Act to the seized gold

Legal framework discussed

2.9 Section 111(o) of the Customs Act was examined as dealing with confiscation of goods "improperly brought" into India from a place outside India, where goods have been exempted from duty/prohibition subject to a condition that is not observed. Section 53 of the SEZ Act (deeming SEZ as territory outside the customs territory for authorised operations) and the definition of "import" in Rule 2(o) of the SEZ Rules were analysed.

Interpretation and reasoning (majority view)

2.10 The majority noted that the show cause notice did not allege that the goods were (a) brought into India illegally, or (b) removed or attempted to be removed from SEZ to DTA. On the contrary, evidence accepted by the Tribunal showed that the gold was lawfully imported by another SEZ unit under a valid bill of entry; this was reflected in the import register and stock register of that unit.

2.11 The majority held that issues of: (i) absence or expiry of LOA of the job-work unit; and (ii) internal movement of goods between units within the same SEZ for job work/sub-contracting under Rules 41 and 42, could not be treated as "goods improperly brought from a place outside India" nor as non-fulfilment of an exemption condition in the sense contemplated by Section 111(o).

2.12 The Tribunal emphasised that the Department had not alleged, nor shown, that the basic customs exemption on import into SEZ was subject to any condition which had been breached in a manner attracting Section 111(o); the violation, if any, was of SEZ operational conditions (LOA, record-keeping), cognisable under the SEZ framework but not convertible into an import-stage violation under Section 111(o).

2.13 Accordingly, the majority held that the essential jurisdictional and factual predicates for invoking Section 111(o) were absent; hence, the confiscation of the seized gold under Section 111(o) was unsustainable.

Reasoning (dissenting view)

2.14 The dissenting Member treated the SEZ as a "deemed port" and reasoned that receipt of gold into a unit without valid LOA and without documents amounted to illegal "import" into the SEZ contrary to SEZ Act/Rules, thus attracting Section 111(o). He further treated the unexplained possession of specified commodity (gold) in an unauthorised unit, coupled with inconsistencies in statements and subsequent production of voucher, as sufficient circumstantial basis to apply confiscation, relying on principles from precedent on smuggled goods and burden of proof.

Conclusion on Issue 2

2.15 By majority, the Tribunal held that Section 111(o) was wrongly invoked, as the seized gold was legally imported into the SEZ by another unit and the alleged contraventions were confined to SEZ-operational conditions. The order of absolute confiscation under Section 111(o) was set aside.

Issue 3 - Sustainability of penalties under Sections 112(a), 112(b) and 114AA of the Customs Act

Legal framework discussed

2.16 Penalties had been imposed under Sections 112(a), 112(b) and 114AA based on alleged illegal possession of gold, operation without valid LOA, and fabrication of vouchers. The Tribunal also considered the nature of retracted statements under Section 108 of the Customs Act and the requirement of corroboration.

Interpretation and reasoning (majority view)

2.17 The majority held that once confiscation under Section 111(o) was unsustainable, the foundation for imposition of penalties under Sections 112(a), 112(b) and 114AA necessarily failed, as these provisions presuppose a legally established contravention rendering goods liable to confiscation.

2.18 On facts, the majority found that:

(i) Ownership and legal import of the seized gold by the supplying SEZ unit were established through bill of entry, import invoice, stock register, job work register and serially numbered vouchers including Voucher No. 69/2018, all produced on record at the investigation and adjudication stages.

(ii) The job-work voucher in question (Voucher No. 69/2018) formed part of a regular series of vouchers duly reflected in the job work register; its authenticity could not be rejected merely because only one voucher in that series was issued to the job-work unit.

(iii) The adverse statement of the job-work unit's partner (dated 04.09.2018), suggesting that the voucher was fabricated post-fact, had been formally retracted on 08.09.2018 and lacked corroboration; conversely, letters and statements of the concerned parties, including during cross-examinations, consistently affirmed that the gold was sent on job work under the said voucher.

2.19 The majority held that in the absence of a legally sustainable finding of "illegal import" or of fabrication proved by independent and corroborative evidence, penal liability under Sections 112 and 114AA could not be fastened merely on the basis of uncorroborated, retracted statements and inferences drawn by the Adjudicating Authority.

2.20 It was further held that operational lapses by the job-work unit (expiry of LOA, non-maintenance of its own records) are issues for SEZ authorities to deal with under the SEZ Act/Rules and cannot, without more, be transformed into Customs offences warranting penalties under Sections 112 and 114AA.

Reasoning (dissenting view)

2.21 The dissenting Member viewed the absence of documents at the time of search, the admitted absence of valid LOA, and inconsistencies between statements regarding preparation of the voucher as sufficient indicators of manipulation and post-fact creation of documents to cover up unauthorised possession. Relying on the principle that the Department may establish smuggling or unauthorised possession by circumstantial evidence and adverse inference from facts within the special knowledge of the concerned persons, he upheld the penalties under Sections 112 and 114AA.

Conclusion on Issue 3

2.22 By majority, the penalties imposed under Sections 112(a), 112(b) and 114AA were held to be unsustainable as the confiscation itself was bad in law and the evidentiary record did not establish the alleged Customs offences. The penalties were therefore set aside.

Issue 4 - Characterisation of intra-SEZ job work and expired LOA: SEZ-only violations versus Customs offences

Legal framework discussed

2.23 Rules 41 and 42 of the SEZ Rules, 2006 (sub-contracting/job work between units in the same SEZ) and the proviso regarding maintenance of serially numbered challans and job work registers; Section 15 and 16 of the SEZ Act concerning grant and cancellation of LOA; and Rule 35 on stock and movement records were considered.

Interpretation and reasoning (majority view)

2.24 The majority found that the supplying SEZ unit had:

(i) legally imported primary gold into the SEZ; and

(ii) duly documented the issue of gold alloy for job work to various SEZ units, including the job-work unit in question, under serially numbered vouchers recorded in a job work register as required by Rules 41 and 42.

2.25 Any failure by the job-work unit to maintain its own internal records, and the fact that its LOA had expired and not been renewed, were treated as SEZ regulatory issues - i.e. violations of the conditions governing authorised operations under the SEZ Act/Rules, to be addressed by the Development Commissioner/Unit Approval Committee under those statutes (for instance, refusal of renewal, de-bonding or other SEZ-specific actions).

2.26 The majority held that such SEZ-regime lapses cannot, without a clear statutory basis, be re-characterised as Customs import offences so as to justify confiscation under Section 111(o) and penalties under Sections 112 and 114AA, particularly when there was no allegation of smuggling, clandestine import into India, or removal/attempt to remove to DTA.

Conclusion on Issue 4

2.27 The Tribunal (by majority) concluded that the disputes relating to sub-contracting/job work within SEZ and to expiry or non-renewal of LOA, as well as non-maintenance of records by the job-work unit, fall within the purview of the SEZ authorities and do not, on the facts of this case, constitute Customs Act offences.

Issue 5 - Authenticity of job-work voucher and failure to issue notice to the importing/owning SEZ unit

Interpretation and reasoning (majority view)

2.28 The majority recorded that the supplying SEZ unit had produced:

- its stock register as on the date of search;

- its job work register maintained under Rule 35 proviso;

- import register, export register;

- all job work vouchers including Voucher No. 69/2018 for issue of 2470.500 gms of 22 carat gold alloy to the job-work unit; and

- import invoice and bill of entry for 27 kg of primary gold.

2.29 All 17 vouchers issued during the relevant period were found to be serially numbered and duly reflected in the job work register; the fact that only one voucher in that series was issued to the job-work unit was held insufficient to brand Voucher No. 69/2018 as fabricated.

2.30 The majority noted that:

(i) Statements and letters from the parties, including cross-examinations, consistently acknowledged that the seized gold was sent by the supplying SEZ unit to the job-work unit under that voucher for job work; and

(ii) The Adjudicating Authority failed to discuss or analyse the stock registers, vouchers and job work registers supplied at its own instance, and relied instead on an uncorroborated, retracted statement to disregard the voucher.

2.31 The majority also held that, despite clear evidence and consistent assertion that the seized gold belonged to and was imported by the supplying SEZ unit, no show cause notice was issued to that unit; this omission further undermined the legality and completeness of the adjudication.

Conclusion on Issue 5

2.32 The majority accepted the authenticity of Voucher No. 69/2018 and the ownership/legal import of the gold by the supplying SEZ unit, and treated the non-issuance of notice to that unit as a serious infirmity in the adjudication process.

Final outcome (majority view)

2.33 In light of the above findings, the majority held that:

(i) The invocation of Section 111(o) of the Customs Act, 1962 and consequential absolute confiscation of the seized gold were without legal basis.

(ii) Penalties imposed under Sections 112(a), 112(b) and 114AA on the appellants were unsustainable.

(iii) Issues concerning expired LOA and non-maintenance of records by the SEZ job-work unit fall within the jurisdiction of SEZ authorities, and any action must be taken under the SEZ Act and SEZ Rules, not under the Customs Act in the manner attempted.

(iv) The impugned order was set aside and all four appeals were allowed with consequential relief as per law.

2.34 The dissenting Member would have upheld the jurisdiction of the Commissioner of Customs, sustained the confiscation and penalties, and dismissed the appeals; however, the majority view prevails.

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