CA Pratik Trivedi & CA Manan Doshi

Introduction

In the labyrinth of legal intricacies surrounding the imposition of export duty on the sale of goods from the Domestic Tariff Area (DTA) to Special Economic Zones (SEZ), a critical examination of the constitutional, statutory, and judicial facets is imperative. This article delves into the flawed interpretation of Rule 27(1) of the SEZ Rules, 2006, and elucidates the intricate legal landscape by dissecting provisions of the Customs Act, 1962, the Customs Tariff Act, 1975, and the SEZ Act, 2005.

Constitutional Foundations: Article 265 and Union List Entry No. 83

The constitutional bedrock of India, as encapsulated in Article 265, explicitly mandates that no tax shall be levied or collected except by authority of law. Union List Entry No. 83 empowers the Central Government to levy customs duty. The symbiotic relationship between constitutional mandates and the Customs Act, 1962, underscores the legality and authority of customs duties.

Levy of Customs Duty: A Glimpse into the Customs Act, 1962

Section 12 of the Customs Act, 1962, delineates the imposition of customs duty on goods imported into or exported from India. Section 12 of the Customs Act, 1962 reads as under–

 Section 12. Dutiable goods. 

(1) Except as otherwise provided in this Act, or any other law for the time being in force, duties of customs shall be levied at such rates as may be specified under [the Customs Tariff Act, 1975 (51 of 1975)], or any other law for the time being in force, on goods imported into, or exported from, India.

 [(2) The provisions of sub-section (1) shall apply in respect of all goods belonging to Government as they apply in respect of goods not belonging to Government.]

[Emphasis supplied…..]

To grasp the scope of customs duty, it is imperative to comprehend the definitions of crucial terms in the charging section, such as “Duties of Customs,” “Goods,” and “Export,” as outlined in Sections 2(15), 2(22), and 2(18) of the Customs Act, 1962, respectively. The same are reproduced hereunder for the ease of reference –

 Section 2(15) “Duty” which reads as “duty” means a duty of customs leviable under this Act;

 Section 2(18) “Export”, with its grammatical variations and cognate expressions, means taking out of India to a place outside India;

 Section 2(22) “Goods” includes –

(a) vessels, aircrafts and vehicles;

(b) stores;

(c) baggage;

(d) currency and negotiable instruments; and

(e) any other kind of movable property;

[Emphasis supplied…..]

Examining these definitions clarifies that customs duties are applicable when the subject of the transaction involves goods, and there is an element of import or export, with corresponding duties specified under the Customs Tariff Act, 1975.

Export Duties Defined: Customs Tariff Act, 1975

Before delving into the controversy surrounding DTA to SEZ transactions, an analysis of Section 8 of the Customs Tariff Act, 1975, is paramount which reads as under –

 Section 8. Emergency power of Central Government to increase or levy export duties. 

(1) Where in respect of any article, whether included in the Second Schedule or not, the Central Government is satisfied that the export duty leviable thereon should be increased or that an export duty should be levied, and that circumstances exist which render it necessary to take immediate action, the Central Government may, by notification in the Official Gazette, direct an amendment of the Second Schedule to be made so as to provide for an increase in the export duty leviable or, as the case may be, for the levy of an export duty, on that article.

(2) The provisions of sub-sections (3) and (4) of Section 7 shall apply to any notification issued under sub-section (1) as they apply in relation to any notification increasing duty issued under sub-section (2) of Section 7.

This section empowers the Central Government to increase or levy export duties under specific circumstances.

Contrary to misconceptions, the term “export” involves the movement of goods from India to a place outside India. In the case of the sale of goods from DTA to SEZ, the movement of goods occurs within India, and they are not being exported from outside India. Therefore, such transactions do not qualify as exports, and consequently, no customs duty in the guise of export duty can be rightfully demanded for the sale of goods from DTA to SEZ.

Goods versus Services: A Clarification

It is crucial to underscore that transactions involving services, which may encompass the supply of goods as part of a composite contract such as works contract services, unequivocally fall outside the purview of the present discussion. It is axiomatic that the imposition of export duty pertains exclusively to goods, and customs duties are not applicable to services. In the context of composition contracts or works contract services, where the supply of goods, such as steel, is integral to the service provided, the application of export duty becomes moot. Therefore, any discussion regarding the levy of export duty should be confined to transactions involving the movement of goods and should not be extrapolated to encompass services, which remain distinctly exempt from customs duties.

The discussion on export duty must be confined to transactions involving the movement of goods. It is imperative to recognize that services, even those incorporating the supply of goods in composite contracts like works contract services, remain outside the purview of export duty. The nuances of these distinctions are essential to ensure a precise and legally sound discourse.

SEZ Rules, 2006, and the Fallacy of Rule 27(1)

Rule 27(1) of the SEZ Rules, 2006, seemingly suggests the imposition of export duty on the sale of goods from DTA to SEZ which reads as under –

Rule 27(1) A Unit or Developer may import or procure from the Domestic Tariff Area without payment of duty, taxes or cess or procure from Domestic Tariff Area after availing export entitlements or procure from other Units in the same or other Special Economic Zone or from Export Oriented Unit or Software Technology Park unit or Electronic Hardware Technology Park unit or Biotechnology Park unit,89[or warehouse] all type of goods, including capital goods (new or second hand), raw materials, semi-finished goods, (including semi-finished Jewellery) component, consumables, spares goods and materials for making capital goods required for authorized operations except prohibited items under the Import Trade Control (Harmonized System) Classifications of Export and Import Items.

Provided that exemptions from payment of duty, taxes or cess drawbacks and concessions on all types of goods and services, required for setting up and maintenance of the factory building allowed to a unit shall also be available to the contractors 90[including sub-contractors] appointed by such unit and all the documents in such cases shall bear the name of the unit along with the contractor and these shall be filed jointly in the name of the unit and the contractor:

Provided further that the unit shall be responsible and liable for proper utilization of such goods and services in all cases.

[Provided also that items prohibited for import can be procured by a Special Economic Zone unit or Developer from a place outside India to the Special Economic Zone with the prior approval of Board of Approval]

[Provided also that for supply of Restricted Items by a Domestic Tariff Area Unit to Special Economic Zone Developer or Unit, the Domestic Tariff Area Unit may supply such items to a Special Economic Zone Developer or Unit for setting up infrastructure facility or for setting up of a Unit and it may also supply raw material to Special Economic Zone Unit for undertaking a manufacturing operation except refrigeration, cutting, polishing and blending, subject to the prior approval of Board of Approval:

Provided also that supplies from Domestic Tariff Area to Special Economic Zones shall attract export duty, in case, export duty is leviable on items attracting export duty.

However, the SEZ Act, 2005, which provides the legal foundation for the SEZ Rules, does not confer the authority to levy customs duties. Moreover, Section 51 of the SEZ Act, 2005 which reads as under, serves as a special provision, stating that the provisions of the Act shall prevail over any inconsistent provisions in other laws.

Section – 51 – The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force or in any instrument having effect by virtue of any law other than this Act.

Demanding export duty on the sale of goods from DTA to SEZ erroneously assumes that Rule 27 of the SEZ Rules, 2006, overrides Section 12 and Section 2(18) of the Customs Act, 1962. This interpretation lacks merit and is fundamentally illegal.

Judicial Precedent: Essar Steel Ltd Case

A pertinent judicial precedent in the case of Essar Steel Ltd, as decided by the Gujarat High Court, supports the contention that no export duty is leviable on the supply of goods from DTA to SEZ. The court, while discussing the scope of Section 51 of the SEZ Act, emphasized the overriding effect of the SEZ Act and refuted any conflicting interpretation. The judgment underscores that the movement of goods from DTA to SEZ is treated as an export under the SEZ Act, and attempting to impose duty runs counter to the purpose of this legal fiction.

Unchanged Legal Landscape: Absence of Legislative Amendments

Crucially, no amendments have been made to the Customs Act, 1962, the Customs Tariff Act, 1975, or the SEZ Act, 2005, authorizing the imposition of customs duty on the supply of goods from DTA to SEZ. The insertion of a proviso under Rule 27 of the SEZ Rules, 2006, does not alter the legal position established by the Essar Steel Ltd judgment. Consequently, the law remains unchanged, and the demand for export duty on the sale of goods from DTA to SEZ lacks a legal foundation.

Conclusion: Navigating the Legal Maze

In conclusion, the imposition of export duty on the sale of goods from DTA to SEZ is fraught with legal inconsistencies and misconceptions. By unraveling the intricate legal anatomy woven into the Customs Act, 1962, the Customs Tariff Act, 1975, and the SEZ Act, 2005, this article aims to provide a comprehensive understanding of the legal nuances surrounding this contentious issue. The constitutional framework, statutory provisions, and judicial precedents collectively affirm that such imposition lacks a solid legal foundation. As the legal community grapples with this hot topic, it is crucial to uphold the sanctity of legal principles and ensure a judicious interpretation that aligns with the constitutional and statutory fabric of India.

Disclaimer:

This article is for educational purposes only and does not constitute legal advice. While efforts have been made to ensure accuracy, the author is not liable for any errors or omissions. Readers should seek legal and professional advice before acting on the information. The author is not responsible for any losses incurred based on the content of this article. This disclaimer is subject to change without notice.

Author Bio

Qualification: CA in Practice
Company: N/A
Location: Ahmedabad, Gujarat, IN
Member Since: 22 Jun 2020 | Total Posts: 3

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One Comment

  1. Rajiv Gupta says:

    It is a matter of serious concern that the lawmakers are so callous in their approach & least bothered about rectification in spite of the deficiencies & discrepancies being pointed out. There is a very serious problem with the attitude of the officials in position in the present regime because they think that they know everything & they are the authority & therefore how a common man can tell or teach them anything. This portends disaster in the making in long term & therefore avoidable. The authorities need to be humble & show passion to improve things & be happy to acknowledge the errors & even grant credit to the authors for their contributions if we want the national to survive & do well.

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