2025 (9) TMI 1171 - HC - Customs

5th proviso to Rule 27(1), SEZ Rules, 2006 invalid; customs duty on DTA?SEZ unauthorized by Section 55

HC held that the 5th proviso to sub-rule (1) of Rule 27, SEZ Rules, 2006, is ultra vires the SEZ Act, 2005 and struck it down. The court found no ... Levy of Export Duty on supply of goods from Domestic Tariff Area (DTA) to Special Economic Zones (SEZs) - Vires of the 5th proviso to sub-rule (1) of Rule 27 of the Special Economic Zones Rules, 2006 - HELD THAT:- The Apex Court in CIT v. MCdowell and Co. Ltd. [2009 (5) TMI 28 - SUPREME COURT], held that “tax”, “duty”, “cess” or “fee” denote various kinds of imposts by State in its power of taxation, depending on the purpose for which they are levied. It was further held that “law” in the context of Article 265 meant an Act of legislature and not an executive order or Rule without express statutory authority. While Section 55 (2)(h) does provide that the Central Government may among others prescribe terms, conditions and limitations subject to which goods or services exported out of or imported into or procured from the Domestic Tariff Area to Special Economic Zone, be exempted from payment of tax, duty or cess under Section 7 of the Special Economic Zones Act, yet, Section 55 does not at all authorize, in any manner, the Central Government to levy customs duty on account of movement of goods from Domestic Tariff Area to Special Economic Zone - A reading of Section 30 of the SEZ Act, 2005, which was reproduced in the preceding paragraphs, would make it clear that this Section specifically makes goods leviable to customs duty, where such goods are removed from a Special Economic Zone to Domestic Tariff Area. There is no other provision in the Act which makes removal of goods from a Domestic Tariff Area to a Special Economic Zone susceptible to levy of such customs duty. In the absence of any delegation of power to the Central Government to levy customs duty on removal of goods from the Domestic Tariff Area to Special Economic Zone Unit, the Central Government in exercise of such delegated powers could not have thus envisaged levying a duty which is clearly without any authority of law. The Apex Court in Gupta Modern Breweries vs. State of J&K and others [2007 (4) TMI 684 - SUPREME COURT], was considering a challenge to Rule 17 of the Jammu and Kashmir Distillery Rules, 1946, under which the Excise Commissioner demanded that distillery licensees deposit amounts towards the salaries and allowances of Excise Department staff posted at their units. The issue was whether Rule 17 could validly impose what was, in substance, a tax absent clear statutory authorization. The Apex Court examined the provisions of similar such statutes in the states of Andhra Pradesh and Bombay, and noted that those Statues had expressly provided for such levy. The 5th proviso to sub-rule (1) of Rule 27 of the Special Economic Zone Rules, 2006, as ultra vires the Special Economic Zone Act, 2005 and is accordingly, struck down. This writ petition is accordingly allowed. ISSUES PRESENTED AND CONSIDERED 1. Whether the 5th proviso to sub-rule (1) of Rule 27 of the Special Economic Zones Rules, 2006, which provides that supplies from the Domestic Tariff Area (DTA) to Special Economic Zones (SEZs) shall attract export duty where leviable, has statutory backing under the Special Economic Zones Act, 2005 or the Customs Act, 1962, and is intra vires the parent statute. 2. Whether the deeming fiction in section 53(1) of the SEZ Act - that an SEZ shall be deemed to be territory outside the customs territory of India for undertaking authorized operations - can be extended to authorize imposition of customs or export duties on supplies from DTA to SEZ Units. 3. Whether delegated rule-making power under section 55 of the SEZ Act permits the Central Government to levy taxes, duties or imposts (specifically export duty) by rule or proviso without express legislative authorization. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Validity of the 5th proviso to Rule 27(1): Legal framework - The SEZ Act provides exemptions from duties for goods imported into or supplied within SEZs (sections corresponding to exemptions), and contains section 30 addressing domestic clearance by Units (levy of customs duty on goods removed from SEZ to DTA). - Section 55 empowers the Central Government to make rules 'for carrying out the provisions of the Act' and, by clause (2)(h), to prescribe terms, conditions and limitations subject to which goods or services procured from the DTA to an SEZ may be exempt from payment of taxes, duties or cess. - The Customs Act contains the general charging provision for customs duties and defines 'export' and the territorial scope of 'India'; earlier statutory provisions specific to SEZs in the Customs Act were repealed/omitted by subsequent enactments. Issue 1 - Precedent treatment - The Court applied settled constitutional and statutory principles that fiscal imposts (tax, duty, cess) require express legislative authority; delegated powers to impose fiscal burdens must be specific and cannot be impliedly read into general rule-making powers. Decisions of the apex court and earlier authorities were followed to establish this principle. Issue 1 - Interpretation and reasoning - The 5th proviso creates a charge of export duty on supplies from DTA to SEZ. Article 265 requires that no tax be levied except by authority of law; 'law' in this context denotes an Act of the legislature, not executive rule-making without express delegation. - Section 30 of the SEZ Act expressly makes removals from SEZ to DTA chargeable to customs duty; conversely, the Act contains no parallel charging provision making supplies from DTA to SEZ subject to export duty. The power under section 55(2)(h) permits prescription of conditions for exemption from taxation, not the imposition of a new charge where the statute is silent. - Legislative history: a prior provision in the Customs Act that expressly charged export duty on admission of goods to SEZ from the DTA was omitted following enactment of the SEZ Act and subsequent amendment. This legislative change indicates the statutory scheme no longer contemplated a levy on admission from DTA to SEZ. Issue 1 - Ratio vs. Obiter - Ratio: It is a matter of ratio that a rule or proviso framed under the SEZ Act cannot impose an export duty on supplies from DTA to SEZ Units absent express statutory authorization; delegated rule-making cannot create a fiscal charge contrary to Article 265 and the statutory scheme. - Obiter: References to historical provisions of the Customs Act and the broader policy/objectives of the SEZ Act serve as supporting reasoning but the core holding rests on the absence of legislative charging power. Issue 1 - Conclusion - The 5th proviso to sub-rule (1) of Rule 27 is ultra vires the SEZ Act, 2005, and is struck down; the decision applying that proviso is set aside. Issue 2 - Effect of the deeming fiction in section 53(1): Legal framework - Section 53(1) deems an SEZ to be territory outside the customs territory of India 'for the purposes of undertaking the authorized operations.' Issue 2 - Precedent treatment - The Court relied on prior judicial treatment that legal fictions must be confined to their legitimate purpose and cannot be extended beyond the field for which they are created. That precedent held that the deeming provision is limited and does not, by itself, create a basis for levying customs duties on supplies into SEZs. Issue 2 - Interpretation and reasoning - The deeming fiction is purposive and limited to enabling authorized operations within the SEZ regime; it does not convert supplies from the DTA to SEZ into taxable exports under the Customs Act absent a charging provision. Extending the fiction to permit a duty would be an impermissible expansion of delegated rule-making authority. Issue 2 - Ratio vs. Obiter - Ratio: The deeming fiction in section 53(1) cannot be read to authorize the imposition of export duty on admissions to SEZs; it cannot be extended to create fiscal liability where the statute does not provide for it. Issue 2 - Conclusion - The argument that the deeming fiction justifies levy of export/customs duty on DTA?SEZ supplies is rejected. Issue 3 - Scope of delegated power under section 55 to impose fiscal burdens: Legal framework - Section 55 authorizes rule-making 'for carrying out the provisions of the Act' and specifies certain matters (including clause (2)(h)) where terms and conditions for exemptions may be prescribed. Issue 3 - Precedent treatment - The Court applied established authorities holding that delegated legislative power to impose taxes, fees or duties must be clear and specific; general delegations to make rules for carrying out purposes of the Act cannot be used to create substantive fiscal burdens not contemplated by the Act. Issue 3 - Interpretation and reasoning - Clause (2)(h) allows framing rules prescribing terms, conditions and limitations for exemption from payment of taxes, duties or cess; it does not confer authority to levy such taxes. Absent express statutory taxing power, rules cannot impose a charge. A general delegation under section 55(1) without guidelines cannot be used to create substantive obligations or disabilities by way of taxation. Issue 3 - Ratio vs. Obiter - Ratio: Delegated rule-making under section 55 cannot be read to include power to impose export/customs duties; such fiscal impositions require express legislative authorization. Issue 3 - Conclusion - The Central Government lacked delegated authority under the SEZ Act to impose the export duty provision contained in the 5th proviso to Rule 27(1); the proviso is ultra vires on this ground as well. Inter-issue cross-reference - Issues 1-3 are interlinked: the limited scope of the deeming fiction (Issue 2) and the constraints on delegated taxing power (Issue 3) both inform the conclusion on the validity of the proviso (Issue 1). Legislative history demonstrating omission of earlier express charging provisions reinforces that the statutory scheme did not contemplate such a levy.