Partial relief granted in appeal on SEZ seized goods; investigation and valuation issues remain unresolved under SEZ Act provisions

HR ENTERPRISES Versus COMMISSIONER OF CUSTOMS - KANDLA CUSTOMS

1. ISSUES PRESENTED and CONSIDERED

• Whether customs authorities have jurisdiction to seize goods stored within a Special Economic Zone (SEZ) unit under the SEZ Act, 2005.
• Whether the seizure of imported goods declared as 'leftover fabrics of tarpaulin' but found to be different types of fabrics is justified and lawful.
• Whether the conditions imposed for provisional release of seized goods, including submission of bond and bank guarantee, are reasonable and justified under Section 110A of the Customs Act, 1962.
• Whether goods warehoused within SEZ are liable to customs duty prior to clearance into Domestic Tariff Area (DTA), in light of exemptions under Section 26 of the SEZ Act, 2005.
• Whether the importer's failure to cooperate with investigation and provide requisite documents justifies stringent conditions for provisional release.
• Appropriateness of the quantum of bank guarantee demanded, particularly the inclusion of differential duty plus penalty at the provisional release stage.
• Whether the appellant should be allowed to re-export or clear goods in DTA without conditions or penalties.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Jurisdiction to Seize Goods Within SEZ

Legal Framework and Precedents: Section 53(1) of the SEZ Act, 2005 restricts customs officers' jurisdiction within SEZ. The appellant relied on judgments holding that customs officers lack jurisdiction to seize goods inside SEZ premises.

Court's Interpretation and Reasoning: The Court recognized the appellant's contention regarding SEZ being a deemed foreign territory and the jurisdictional limitation. However, it held that such questions of jurisdiction and duty liability can only be conclusively addressed after issuance of show cause notice and adjudication process. At the provisional release stage, these issues are premature.

Conclusion: Jurisdictional objections are deferred to adjudication. The Court will not interfere with the seizure legality at provisional release stage.

Issue 2: Legality and Justification of Seizure Based on Mis-declaration

Legal Framework and Evidence: The goods were declared as 'leftover fabrics of tarpaulin' but examination and testing by CRCL Vadodara revealed multiple types of fabrics (woven, non-woven, PVC/PU coated etc.). Seizure was under Section 111 of the Customs Act, 1962 for mis-declaration.

Court's Reasoning: The Court noted that test reports received prima facie indicate discrepancies in composition. However, final determination requires adjudication, including possible retesting and cross-examination of experts. Investigation was ongoing and incomplete.

Conclusion: Seizure is prima facie justified but final sustenance depends on adjudication. The Court refrained from final conclusion at this stage.

Issue 3: Applicability of Customs Duty on Goods Within SEZ Under SEZ Act, 2005

Legal Framework: Section 26 of the SEZ Act, 2005 grants exemption from customs duty on goods imported into SEZ for authorized operations. Duty becomes payable only when goods move from SEZ to DTA.

Appellant's Argument: Since goods are warehoused within SEZ, no customs duty is payable at this stage, and thus, conditions for provisional release demanding bond and bank guarantee are legally incorrect.

Court's Analysis: The Court acknowledged the exemption under Section 26 and that SEZ is a deemed foreign territory. However, it emphasized that the question of duty liability and classification disputes must be adjudicated after investigation. The Court did not accept the appellant's contention to waive conditions solely on this ground at provisional release stage.

Conclusion: Duty exemption under SEZ Act is recognized but does not preclude provisional conditions pending adjudication.

Issue 4: Reasonableness and Legality of Conditions Imposed for Provisional Release (Bond and Bank Guarantee)

Legal Framework: Section 110A of the Customs Act, 1962 mandates taking bond in proper form with security and conditions as adjudicating authority may require for provisional release. Circular 35/2017 guides discretion in imposing conditions.

Court's Reasoning: The Court held that submission of bond equal to the value of goods with an undertaking to pay duty, fine, or penalty is a mandatory and justified condition. However, the imposition of a bank guarantee covering 100% of differential duty plus 10% penalty was found onerous and disproportionate at the provisional release stage.

The Court emphasized that provisional release aims to balance revenue protection and preventing goods deterioration. It criticized mechanical imposition of maximum financial security without considering the ongoing nature of investigation and the appellant's rights. The Court noted that the department's duty calculations are tentative and subject to change upon adjudication.

Conclusion: Condition requiring bond equal to goods value is upheld. Condition demanding full bank guarantee covering differential duty plus penalty is modified as excessive and contrary to the purpose of provisional release.

Issue 5: Importer's Non-Cooperation and Impact on Provisional Release Conditions

Evidence: The importer failed to provide requested documents such as packing lists, purchase agreements, and financial transaction details. Searches revealed the importer's premises to be a nominal address with a dummy director and lack of operational business knowledge.

Court's Analysis: The appellant's non-cooperation and suspicious circumstances justified the department's cautious approach. However, the Court balanced this with the need to allow provisional release on reasonable terms to prevent loss due to goods deterioration.

Conclusion: Non-cooperation supports imposition of security but does not justify excessive conditions defeating the purpose of provisional release.

Issue 6: Allowance for Re-export or Clearance into DTA Without Conditions or Penalties

Appellant's Submission: The appellant sought provisional release without conditions to allow re-export or clearance into DTA freely.

Court's Reasoning: The Court held that movement of goods from SEZ to DTA or re-export requires compliance with statutory provisions and security for duty payment where applicable. It directed that for re-export, a bank guarantee of 10% of goods' value is sufficient, as no duty is payable. For clearance into DTA, 50% of differential duty must be deposited upfront, allowing payment in installments as goods are cleared.

Conclusion: Provisional release without any conditions is not permissible. Reasonable conditions linked to duty payment and security are mandated.

Issue 7: Quantum and Mode of Payment of Security for Provisional Release

Court's Analysis: The Court modified the impugned order by directing that instead of 100% differential duty plus penalty as bank guarantee, the importer shall deposit 50% of differential duty at the time of clearance from SEZ to DTA or movement to other SEZ/EOU units. The balance may be paid in installments as goods are cleared. For re-export, a 10% bank guarantee is sufficient.

The Court emphasized a pragmatic approach balancing revenue protection and business viability, preventing goods deterioration, and avoiding undue hardship.

Conclusion: Bank guarantee and duty deposit conditions are modified to a more reasonable and practicable regime facilitating provisional release.

Summary of Court's Conclusions:

• Jurisdictional and duty liability issues within SEZ are deferred for adjudication; seizure legality not interfered with at provisional release stage.
• Seizure based on prima facie mis-declaration is justified but final outcome depends on adjudication.
• Section 26 SEZ Act exemptions acknowledged but do not obviate provisional release conditions.
• Bond equal to goods value with undertaking is mandatory and justified.
• Bank guarantee covering full differential duty plus penalty at provisional release stage is excessive and modified.
• Importer's non-cooperation supports caution but does not justify onerous conditions defeating provisional release purpose.
• Provisional release conditions modified to require 50% differential duty deposit for DTA clearance or movement and 10% bank guarantee for re-export.
• Adjudicating authority's discretion must balance revenue protection with avoiding undue hardship and goods deterioration.