PART-1: SEZ- PROPRIETY OF NOTICE AND ADJUDICATION UNDER CUSTOMS LAW:

      

By Adv. Ram Chander Sankhla, Managing partner at Sankhla Law Associates and Former Chief Commissioner of CGST & Customs

Adv. Rahul Sankhla, Partner, Sankhla Law Associates

 

  1. Everything has purpose in life. The purpose of Rule of law is to ensure Equity, Fairness, Justice, Discipline, Consistency and ultimate positive evolution. In theory, the Constitutional and Statutory Authorities must follow rule of law. In practice, how the statutory authorities violate rule of law, in the name of following it, is the subject matter of this article.
  2. Do the customs officer, including enforcement agencies like DRI, has the authority to arrest and/or prosecute a SEZ entrepreneur or developer? Whether they can issue Notices demanding duties/taxes, adjudicate those notices, are some of the burning and long pending issues, which have been attracting the attention of various stakeholders, i.e. Ministry of Commerce, Ministry of Finance, Entrepreneur, Developer, Consultants, Lawyers and Courts.
  3. The Issue of ‘Power to arrest’ has already been analysed in the article available on the website www.rrsla.com. To understand the issue regarding authority to issue the demand notices and adjudicate them, it is worthwhile to unravel, first, and briefly, the history of the SEZ and relevant provisions of SEZ Act 2005 and rules made thereunder, in India.

Why, When & What of the SEZ:

  1. Free trade zones operate all across the globe and known differently in different piece of land. Some nations call them, Export Processing Zones (EPZ), Free Trade Zones (FTZ), Export Oriented Zones and Special Economic Zones (SEZ). These zones are usually demarcated as separate piece of land, having special Concessions, Exemptions and Facilities to ensure Export led growth.
  2. Before the advent of SEZ Act 2005, SEZ Scheme was implemented under chapter XA (sections 76A to 76N) of Customs Act, 1962 and the Special Economic Zones Rules, 2003 and the Special Economic Zones (Customs Procedures) Regulations, 2003. It was implemented, executed and enforced by the Customs Officials.
  3. Chapter X-A was inserted with effect from 1-4-2004 vide Notification No. 43/2003-Cus. (N.T.), dated 22-7-2003, whereby special provisions relating to SEZ were inserted. Under Section 76A, Central Government was empowered to notify and specify Special Economic Zones comprising specifically delineated areas where any goods admitted shall be regarded, in so far as duties of customs are concerned, as being outside the customs territory of India as provided under the said Chapter. Under Section 76B, the provisions of the said Chapter X-A and other Chapters are to apply to the goods admitted to a SEZ, but in the event of conflict between the provisions of Chapter X-A and other Chapters, the provisions of Chapter X-A were to prevail. Section 76-C empowered the Central Government to make Rules. Under Section 76D, any goods imported directly from outside India or procured from within India were to be authorized for admission to a SEZ. Section 76E while empowered exemption of duties of customs to any goods admitted to the Special Economic Zone, Section 76F empowered to levy duty of customs to any goods admitted to the SEZ. Section 76G dealt with “authorized operation” including processing or manufacturing as may be specified in the Rules, Section 76H relates to goods utilized within the Special Economic Zone. The other provisions have been made under Sections 76-I to 76N of the said Act.
  4. As per Notification No. 320(E) dated 14.03.2006 issued by Ministry of Commerce, the provisions of Chapter XA of the Customs Act, 1962 were specifically made not applicable to the working of the SEZ, w.e.f. 14.03.2006. It is interesting to note that SEZ Rules, 2003 were finally rescinded vide Notification No. 13/2007-Cus (NT) dated 21-2-2007, despite the notification dated 14.03.2006, already stood issued by Ministry of Commerce. (May be Revenue and Commerce mandarins were not on same wave-length).
  5. Statement of Objects and Reasons of the SEZ Act, 2005, stated that this scheme was announced with a view to provide internationally competitive environment for exports. The objectives include making available goods and services, free of taxes and duties supported by integrated infrastructure for export production, expeditious and single window approval mechanism and a package of incentives to attract foreign and domestic investments for promoting export led growth.
  6. The SEZ units and Developers are put under the administrative control of the Development Commissioners under the Ministry of Commerce (MoC) to grant necessary permissions, to provide other facilities and also to undertake investigation and impose penalties for violation of any of the provisions of the SEZ Act.
  7. Section 26 ensures exemptions, drawbacks and concessions to every developer and entrepreneur from any duty of customs, under the Customs Act, 1962 or the Customs Tariff Act, 1975 or any other law for the time being in force, on imports into or export from SEZ.
  8. Section 20, 21 and 22 of the SEZ Act, and notifications issued thereunder, provide legitimacy to various officer or agencies so specified/authorised to carry out surveys, inspections, investigations, search and seizure for the offences under the SEZ law or for securing of compliance with the provisions of any Central Act, where such provision of Central Act are so notified. As per Ministry of Commerce and Industry (Department of Commerce) notification, SO-2665-E dated 5 August 2016 issued from F.No. C.1/1/2009 – SEZ, the government notified the offences contained in Section 28, 28A, 28AA, 74, 75, 111, 113, 115, 124, 135 and 104 of the Custom Act as offences under the SEZ Act. As per SO- 2666-E dated 5th 2016 issued under sections 21(2) and 22 of the SEZ Act, the central government has authorized the Additional Director General, DRI and DGGI, ONLY, to be the enforcement officer(s) in respect of any notified offence or offences committed or likely to be committed in a Special Economic Zone, with the power of investigation, inspection, search or seizure only.
  9. Section 30 of the SEZ Act (domestic clearance from SEZ) read with rule 47 and 48 (sale/procedure for sale in DTA) of the SEZ rules 2006, prescribes that any goods removed from a SEZ to DTA shall be chargeable to duties of customs, as leviable on such goods when imported, and is reproduced,

“30. Domestic clearance by Units. —Subject to the conditions specified in the rules made by the Central Government in this behalf, —

(a) any goods removed from a Special Economic Zone to the Domestic Tariff Area shall be chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975 (51 of 1975), where applicable, as leviable on such goods when imported; and

(b) the rate of duty and tariff valuation, if any, applicable to goods removed from a Special Economic Zone shall be at the rate and tariff valuation in force as on the date of such removal, and where such date is not ascertainable, on the date of payment of duty.”

 

  1. Section 51 of the SEZ Act is a non-obstante clause which states that 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.
  2. Section 53 of the SEZ Act defines SEZ/ FTWZ as a deemed territory outside the customs territory of India for the purposes of undertaking the authorised operations.
  3. Under section 55, the Central Government may make rules for carrying out the provisions of SEZ Act.
  4. MoC vide notification no. GSR 772(E) dated 08.08.2016 inserted sub rule 5 in Rule 47 of the SEZ Rules 2005, vide which power of demands, refunds, adjudication was given to jurisdictional customs and excise authorities in accordance with Customs and Excise law. In this regard, Central Board of Indirect Taxes & Customs (CBIC) issued operational guidelines vide MF(DR) circular No. 11/2017-Cus dated 31-3-2017. It needs emphasis that, ONLY JUSIDICTIONAL CUSTOMS AND EXCISE AUTHORITIES, have been bestowed power under rule 47 (5) and not any other enforcement agencies like DRI, DGGI, Preventive formations etc. This is despite the issue whether rule 47(5) of SEZ rules can bestow such power, in the absence of any such provision in the SEZ Act, which is going to be discussed shortly. For the sake of better understanding, it needs to be produced as,

“Chapter 5
Conditions subject to which goods may be removed from a special economic zone to the Domestic Tariff Area

 

  1. Sales in Domestic Tariff Area. – 

 

(1) A Unit may sell goods and services including rejects or wastes or scraps or remnants or broken diamonds or by- products arising during the manufacturing process or in connection therewith, in the Domestic Tariff Area on payment of Customs duties under section 30, subject to the following conditions, namely.-

(4) Valuation and assessment of the goods cleared into Domestic Tariff Area shall be made in accordance with Customs Act and rules made there under.

 

(5) Refund, Demand, Adjudication, Review and Appeal with regard to matters relating to authorised operations under Special Economic Zones Act, 2005, transactions, and goods and services related thereto, shall be made by the Jurisdictional Customs and Central Excise Authorities in accordance with the relevant provisions contained in the Customs Act, 1962, the Central Excise Act, 1944, and the Finance Act, 1994 and the rules made there under or the notifications issued there under.”

 

 

  1. Vide rule 79 of SEZ rules, as inserted vide GSR 772(E) dated 05.08.2016, all the authorised operations/transactions under SEZ law, will be audited by the customs officers from a panel drawn by jurisdictional Development Commissioner, in consultation with jurisdictional Chief Commissioner of Customs and C. Excise.

Authority to Demand/Adjudicate:

  1. The customs officials have been issuing demand notices and adjudicating them since 2005, also, that is, even after the SEZ Act 2005. These notices have been issued under section 28 of the Customs Act followed by their adjudication, resulting into confiscation of the goods, in many cases, along with Penalties under section 112/114 of the Customs Act.
  2. There have been Various court rulings, though conflicting, on the Jurisdictional aspect of Customs officer, regarding the demand and adjudication pertaining to SEZ.
  3. It is also important to analyse section 51 of the SEZ Act, to appreciate the rationale behind various provisions and the available court rulings. Section 51 prevails and ensures that the provisions of SEZ Act shall have effect over other laws, notwithstanding anything inconsistent with it. This is a non obstante clause. The plain, literal meaning of this section conveys that it is SEZ Act, which will prevail over other laws, whether these laws are inconsistent or otherwise. In other words, whether there is inconsistency or not with SEZ Act, it is this Act, which will prevail over other laws. To put it differently, not only the inconsistency, but also consistency, with SEZ Act, the SEZ Act will prevail.
  4. This can be understood better with examples. As per Section 26 of the SEZ Act, various concessions, exemptions & drawback of customs duties are given. Any law denying such exemptions etc., will be clearly inconsistent with the provisions of the SEZ Act, and will have no impact. Section 30 of the SEZ Act states that, subject to the conditions specified in the rules, any goods removed from SEZ to DTA shall be chargeable to duties of customs, among other. Thus, any law negating such chargeability is inconsistent. Similarly, any law providing for any authority other than SEZ authorities to collect, demand and adjudicate on such removal to DTA, is clearly inconsistent with SEZ Act.
  5. Suppose, a murder takes place in a SEZ area. Whether Indian Penal Code (IPC) (now Bhartiya Nyaya Sanhita (BNS)) will be applicable or will it be inconsistent with SEZ Act. As we all know SEZ Act deals with promotion of export, formation and development of SEZ areas, grant of various fiscal benefits and concessions, and Authorised Operation. But it does not deal with the subject of Murder or IPC/BNS, and talks nothing in this regard. So, Indian Penal Code (now Bhartiya Nyaya Sanhita) is not inconsistent with SEZ Act. However, it is also not consistent with SEZ Act, because this Act says nothing about murder, so any law detailing about murder and its applicability to it, is not consistent with it (SEZ Act). It needs emphasis that if anything is NOT consistent, does not necessarily mean that it is INCONSISTENT. Also, SEZ is deemed territory outside the customs territory of India is ONLY for authorised operation, and committing murder cannot be authorised operation.
  6. Thus, before proceedings further it is of utmost importance to actually understand the meaning and import of section 51 of SEZ Act. And, what is inconsistent, consistent and ‘Not consistent’ is not pure matter of law.

Meaning of Deemed Territory:

  1. Equally important is to throw light on the meaning and import of Section 53 of SEZ Act. Sub-section 1 says that the SEZs are deemed to be a territory, outside the customs territory of India, for the purposes of undertaking the authorised operations. This only means that, for the purposes of availing the benefit of customs (imports & exports) under relevant customs law, the supply to/from the unit or developer in/out a SEZ are eligible for said benefits. By this deeming fiction, the territory falling under SEZ are deemed as territory beyond customs territory of India so that the customs related benefits or exemptions can be granted if the government so wishes qua the AUTHORISED OPERATION ONLY. If the activities are not related to the authorised operations, then SEZ is not deemed to be outside the customs territory of India even as per section 53 of the SEZ Act.

Concluded in the FINAL PART….

DISCLAIMER:  The views and opinions expressed in this article are solely those of the authors and do not necessarily reflect the official policy or position of any other individual, organization, employer or Firm. The information provided in this article is accurate and true to the best of the author’s knowledge, but there may be omissions, errors, or mistakes. The authors shall not be liable for any damages, losses, or injuries arising from the use of or reliance on the information presented in this article. Readers are advised to verify any information provided here and to consult with appropriate professionals for specific advice tailored to their individual circumstances.

 

Authors can be reached at www.rrsla.com | info@rrsla.com | 9654941800

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