SEZ supplies and customs duty: duty, consequential interest, and unnotified penalty were held unsustainable

Goods supplied to an SEZ unit for authorised operations were held not to attract customs duty because the SEZ regime overrode the charging provisions in that context, and the duty demand was therefore set aside. Once the duty demand failed, interest and the penalty under section 114 of the Customs Act, 1962 could not survive as they were consequential. The penalty under section 114AA was also held unsustainable because the show cause notice had not proposed that specific penal action, depriving the noticee of effective notice. The order confirming duty, interest, and penalties was set aside insofar as it related to the appellant.

---

---

Issues: (i) Whether customs duty could be demanded on the supply of M.S. scrap to a unit located in a Special Economic Zone; (ii) whether interest and penalties could survive once the duty demand was set aside; and (iii) whether penalty under section 114AA of the Customs Act, 1962 could be imposed when the show cause notice did not propose such penalty.

Issue (i): Whether customs duty could be demanded on the supply of M.S. scrap to a unit located in a Special Economic Zone.

Analysis: The supply was made to a unit in a Special Economic Zone and the Tribunal followed its earlier view that the charging provisions stand overridden by the Special Economic Zone regime in respect of goods supplied for authorised operations. In the absence of legal authority to levy and collect duty on such supplies, no customs duty could be sustained, and the constitutional bar against levy without authority of law was attracted.

Conclusion: The duty demand was not sustainable and was set aside.

Issue (ii): Whether interest and penalties could survive once the duty demand was set aside.

Analysis: Interest was only consequential to the duty demand, and once the demand itself failed, no basis remained for charging interest. Likewise, the penalty under section 114 of the Customs Act, 1962 could not stand when the underlying demand was unsustainable.

Conclusion: Interest and the penalty under section 114 of the Customs Act, 1962 could not be sustained.

Issue (iii): Whether penalty under section 114AA of the Customs Act, 1962 could be imposed when the show cause notice did not propose such penalty.

Analysis: Penalty under section 114AA requires that the notice put the noticee to effective notice of the proposed penal action. Since the show cause notice did not call upon the appellant to meet a proposed penalty under that provision, the imposition of such penalty was not permissible.

Conclusion: The penalty under section 114AA of the Customs Act, 1962 was not sustainable.

Final Conclusion: The order confirming duty, interest, and penalties against the appellant was set aside in its entirety insofar as it related to the appellant, and the appeal succeeded.

Ratio Decidendi: Goods supplied to a Special Economic Zone for authorised operations cannot be subjected to duty where the SEZ regime overrides the charging provisions, and consequential interest or penalties cannot survive in the absence of a valid duty demand; a penalty not proposed in the show cause notice is also impermissible.

---