SEZ Developer/Co developer Exit

[Abhijeet Mane]

We are a co developer in Puthuvypeen SEZ (Kochi) and exploring de notification. Dept. of Commerce (File No. F 2/15/2005 SEZ(Vol III)(Pt.), 10 Apr 2024) has clarified that Rule 49 depreciation applies to Developers at exit.

Need expert views on:

1. Does Rule 49 depreciation apply only to 'capital goods' or also to 'infrastructure' (civil/common assets), since 'capital goods' is defined separately in Rule 2(e) of SEZ Rules?
2. If infrastructure is not eligible, is the standard practice to repay full duty/GST benefits actually availed (no depreciation), supported by CE certification? (As seen in Rule 11B clarifications.)
3. Any real cases of developer/co developer denotification and the methodology accepted by authorities for duty repayment?

[YAGAY andSUN]

In the context of denotification or exit of a Developer or Co-Developer from a Special Economic Zone, the relevant legal framework is contained in the Special Economic Zones Rules, 2006, particularly Rule 49 read with the definition of “capital goods” under Rule 2(e). Rule 49 provides that where capital goods are removed from an SEZ to the Domestic Tariff Area, duty shall be payable on the depreciated value of such capital goods calculated from the date of commencement of use. The rule is therefore limited in scope and applies only to capital goods. Since “capital goods” under Rule 2(e) primarily covers plant, machinery, equipment and similar movable assets required for authorised operations, the depreciation mechanism under Rule 49 is generally interpreted as applicable only to plant and machinery or other movable capital assets, and not to immovable civil infrastructure forming part of SEZ development.

Where the assets involved consist of civil infrastructure or common facilities; such as buildings, utilities, roads or other immovable structures, the prevailing interpretation is that such assets do not qualify as “capital goods” and therefore do not benefit from the depreciation mechanism under Rule 49. In such cases, the commonly adopted approach is that the Developer or Co-Developer is required to repay the fiscal benefits actually availed (including customs duty, excise duty or GST exemptions) at the time of denotification or exit. The computation is typically based on the actual benefits availed in respect of the relevant infrastructure, rather than on depreciated value.

In practice, during SEZ denotification or conversion processes, authorities generally accept a methodology whereby depreciation is applied only to plant and machinery in terms of Rule 49, while benefits attributable to civil infrastructure are repaid in full. The repayment calculations are usually supported by project records and certifications such as a Chartered Engineer's certificate, identifying the assets and quantifying the duty or tax benefits availed. Where denotification relates only to a portion of the SEZ, the benefits are often allocated proportionately based on built-up area or project cost, subject to verification by the Development Commissioner and jurisdictional authorities.

AI Summary

Depreciation under Rule 49 applies to capital goods; immovable infrastructure benefits are typically repayable in full on exit. Rule 49 applies a depreciation-based duty charge to capital goods removed from an SEZ to the Domestic Tariff Area, and-given the Rule 2(e) definition-covers plant, machinery and similar movable assets. Immovable civil infrastructure and common facilities generally do not qualify as capital goods and therefore do not benefit from Rule 49 depreciation; instead, repayment of fiscal benefits actually availed is the commonly adopted approach, supported by project records and certifications, with proportional allocation permitted for partial denotification subject to authority verification.