2025 (10) TMI 17 - HC - Customs

Claim dismissed as goods fall under SEZ Rule 25 not Rule 27(9); non-use under Rules 37 and 12(5)

M/s Quarkcity India (Pvt.) Ltd. Versus Union of India and others

HC dismissed the petition, holding the goods fell within Rule 25 of SEZ Rules rather than Rule 27(9). The court found the unit failed to utilize imported ... Refund of customs duty equal to benefit of exemptions, drawbacks, cess and concessions availed under Rule 25 of SEZ Rules - petitioner had failed to utilize the goods in spite of extensions given for the same - Principle of promissory estoppel and legitimate expectations - HELD THAT:- It is apparent that fields of operation of Rule 27(9) and Rule 25 of SEZ Rules are different. Rule 27 (9) of SEZ Rules provides that goods and parts thereof imported or procured from Domestic Tariff Area [Domestic Tariff Area as per Section 2(i) means the whole of India (including territorial waters and continental shelf) but does not include area of Special Economic Zones] when found to be defective or otherwise unfit for use or which may have been damaged or become defective after such import or procurement may be sent outside SEZ without payment of duty for repairs and replacement to the supplier or its authorized dealers or be destroyed. It is apparent that goods referred to in this provision would be those which when received in SEZ are found to be defective or otherwise found to be unfit and those which may have damaged or become defective after such import or procurement i.e. during use in SEZ. There is merit in the argument raised by learned counsel for respondents that in the present case, what is involved are goods which have become defective or damaged due to their non-utilisation by Unit or Developer within the stipulated period, thus, such goods would fall within the ambit of Rule 25 of SEZ Rules - Rule 37 of SEZ Rules clearly provides that goods admitted to SEZ shall be utilized, exported or disposed of in accordance with the Act and Rules within the validity period of Letter of Approval issued to such Unit or in case of development within one year or such extended period as may be allowed under Rule 12(5) of SEZ Rules and upon failure to utilize or dispose of goods as above, it shall be liable to pay duty as if the goods have been removed to Domestic Tariff Area on expiry of validity period under sub Rule 1. In the present case, petitioner – Company on 20.09.2013 had sought permission for extension of unutilized goods under Rule 12(5) of SEZ Rules. Extension was granted to petitioner for utilization of these goods upto 19.09.2014. Petitioner again submitted a request on 08.09.2014, for an extension of three years. It is upon query of respondent (Specified Officer) that goods in question were categorized by petitioner into three categories and thereafter the third category was further divided into another two sub-categories - Argument raised by learned counsel for petitioner that its application for further extension was still pending, therefore, respondent has incorrectly and arbitrarily sought refund in question from petitioner is devoid of any merit. This is so for the reason that respondent had admittedly taken a decision in this respect at an earlier point of time, therefore, submission of fresh application/representation by petitioner in this scenario cannot be of any avail whatsoever to petitioner. There are no ground whatsoever which calls for interference in this matter in exercise of jurisdiction under Article 226 of Constitution of India - petition dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the levy and demand of refund of customs-duty-equivalent benefits under Rule 25 of the SEZ Rules was legally sustainable in respect of goods which remained unutilised or became unfit for use, as opposed to permitting destruction/repair under Rule 27(9). 2. Whether the Developer/Unit's requests for extension under Rule 12(5)/Rule 37 could, as a matter of law, preclude application of Rule 25 once goods remained unutilised beyond permitted/extended periods. 3. Whether the decision of the Union Approval Committee (UAC) directing refund of benefits (and consequent communications by the Specified Officer) was vitiated by arbitrariness, failure to consider material (including expert certificate), or breach of legitimate expectation/promissory estoppel. 4. Whether, on the facts, there existed any procedural or legal infirmity warranting interference under the High Court's writ jurisdiction (Article 226) with the demand and deposit requirements directed by authorities. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Rule 25 versus Rule 27(9) Legal framework: Rule 27(9) permits goods found defective or unfit for use, or damaged or become defective after import/procurement, to be sent outside the SEZ for repair/replacement or to be destroyed (with specified permissions); Rule 25 requires refund of benefits where goods/services on which exemptions/drawbacks/cess/concessions were availed are not utilised or cannot be duly accounted for. Precedent Treatment: No precedents were cited or applied in the judgment; the Court relied on plain text of the Rules. Interpretation and reasoning: The Court construed Rule 27(9) as addressing goods that are defective at receipt or become defective during legitimate use in the SEZ; Rule 25 was seen to address goods unutilised within the authorised/extended period. The factual matrix showed that the goods became unfit due to non-utilisation (failure to use within allowed/extended period) rather than becoming defective while in use. Hence goods fell within Rule 25's matrix rather than Rule 27(9). Ratio vs. Obiter: Ratio - where goods remain unutilised beyond validity/extended period and thereby become unusable, the statutory consequence under Rule 25 (refund of benefits) is attracted rather than the remedial provisions of Rule 27(9). Obiter - explanatory distinctions about the types of defects contemplated by Rule 27(9). Conclusion: The levy/demand under Rule 25 was legally sustainable; Rule 27(9) did not apply on the facts. Issue 2 - Effect of extension requests under Rule 12(5)/Rule 37 on liability under Rule 25 Legal framework: Rule 37(1) requires utilisation/export/disposal within Letter of Approval validity or one year (for Developer) or such extended period as allowed under Rule 12(5); Rule 25 imposes refund liability where goods are not utilised or not duly accounted for. Precedent Treatment: None cited; Court applied statutory construction. Interpretation and reasoning: The chronology established that extensions had been sought and an extension was granted for certain categories. For goods not covered by the extension (category C/C-A/C-B), the Specified Officer had earlier communicated applicability of Rule 25. A fresh/pending extension application could not cure the prior determination and could not retrospectively nullify a decision already taken by competent authority. The Court emphasised that extensions, where granted, were fact-specific and that continued requests to treat already non-utilised goods as usable were not determinative when the authority had earlier applied Rule 25. Ratio vs. Obiter: Ratio - a pending or subsequent application for extension does not automatically bar application of Rule 25 where the authority had already validly determined non-utilisation and directed refund; extensions do not operate as a shield if goods fall squarely within Rule 25 on facts. Conclusion: The existence of applications for further extension did not invalidate the demand under Rule 25 once the authority had, on earlier consideration, determined non-utilisation and applied Rule 25. Issue 3 - Validity of UAC decision / Claim of arbitrariness, non-application of mind, and legitimate expectation/promissory estoppel Legal framework: Administrative law principles of arbitrariness, requirement to consider material, and doctrines of legitimate expectation/promissory estoppel apply subject to statutory scheme; decisions must conform to the rules (SEZ Rules) and be within conferred powers. Precedent Treatment: No precedents were invoked; the Court applied common law/admin-law principles to facts and statutory provisions. Interpretation and reasoning: The Court examined the record: petitioner had been advised earlier that Rule 25 applied; UAC/Specified Officer considered the matter and directed refund; the petitioner's subsequent submissions and an expert certificate were insufficient to displace the earlier determination that goods had not been utilised in the relevant periods and were originally treated as usable when extension requests were made. The Court found no indicia of caprice, denial of hearing, or failure to consider material - rather a reasoned administrative position that non-utilisation triggered Rule 25. On promissory estoppel/legitimate expectation, the Court found no affirmative statutory assurance or representation that could estop application of Rule 25; mere expectations or administrative delays did not confer a right to exemptions beyond the Rules. Ratio vs. Obiter: Ratio - where a regulatory/administrative authority acts pursuant to express statutory provisions and earlier communications reasonably indicate applicability of a provision (Rule 25), allegations of arbitrariness or legitimate expectation do not suffice to invalidate the demand absent demonstrable procedural breach or unlawful promise. Obiter - general observations that bona fide commercial reasons or economic slowdown do not, by themselves, override express statutory liabilities. Conclusion: The UAC/Specified Officer's decision was not arbitrary or in breach of required procedure; claims of legitimate expectation/promissory estoppel failed on the facts. Issue 4 - Scope for judicial interference under writ jurisdiction Legal framework: Writ jurisdiction under Article 226 permits interference where decision is illegal, arbitrary, mala fide, or beyond statutory power; courts will not substitute their view for that of administrative authority on pure facts unless jurisdictional error or illegality is made out. Precedent Treatment: No judicial precedents were invoked; the Court applied standard principles for judicial review. Interpretation and reasoning: Given the undisputed factual matrix and the statutory provisions directly applicable (Rules 25, 27(9), 37, 12(5)), the Court found no jurisdictional error, illegality or arbitrariness warranting interference. Petitioner failed to point out any infirmity in the impugned actions or any procedural violation that would attract interference under Article 226. Ratio vs. Obiter: Ratio - in absence of demonstrable illegality, procedural failure, or misapplication of power, the Court will not interfere with administrative determinations made under the SEZ Rules with respect to refund liability for unutilised goods. Conclusion: No ground for judicial interference existed; writ petition was dismissed.