FINAL PART: 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

….. Continued from Part 1 …

Can Rule be enacted, in absence of provision in the Act:

  1. Now, let us talk about Rule 47(5) of the SEZ Rules, as inserted with effective from 08.08.2016. No doubt that the SEZ rules has been framed under section 55 of the SEZ Act, which gives them legitimacy for carrying out the provisions of the Act.

 

  1. As seen earlier that it is section 30 of the SEZ Act, which gives power to levy customs duty, in case of removal to DTA. This section starts with the words, ‘Subject to the condition specified in the rules’. Only sub rule 1 of rule 47 has been framed using this authority under section 30. However, the other sub-rules, including sub-rule 5 do not draw their legitimacy/ authority from said section 30.

 

  1. It is clear that vide section 30, as reproduced above that only CONDITIONS can be specified. Though sub rule 5 has NOT been issued under section 30, it still specifies no conditions, but creates jurisdictional authority and legitimacy to jurisdictional customs and central excise authority. It is settled that unless the power is given in the Act itself, rules cannot be framed to create new subject or jurisdiction for any particular authority.

 

  1. It is settled that rules are subservient to legislation (Act). They are subordinate and must serve the purpose of later. Rules cannot override or super-cede or defeat the purpose of the Act. Subordinate legislation must strictly answer to primary legislation. The delegated legislation cannot travel beyond the scope of parent statute. These principles are long settled and have been followed since.

 

  1. In case of ISPAT INDUSTRIES LTD. Vs COMMISSIONER OF CUSTOMS, MUMBAI, reported at 2006 (202) E.L.T. 561 (S.C.) [29-09-2006]. To quote relevant paras,

 

“34. In the Shabar Bhashya translated into English by Dr. Ganga Nath Jha, published in the Gaekwad Oriental Series, the Sutra is read as follows : “Where there is a conflict between the use and the substance greater regard should be paid to the use” Commenting on Jaimini 3:3:9 Kumarila Bhatta says : “The Siddhanta laid down by this Sutra is that in a case where there is one qualification pertaining to the Accessory by itself and another pertaining to it through the Primary, the former qualification is always to be taken as set aside by the latter. This is because the proper fulfilment of the Primary is the business of the Accessory also as the latter operates solely for the sake of the former. Consequently if, in consideration of its own qualification it were to deprive the Primary of its natural accomplishment then there would be a disruption of that action (the Primary) for the sake of which it was meant to operate. Though in such a case the proper fulfilment of the Primary with all its accompaniments would mean the deprival of the Accessory of its own natural accompaniment, yet, as the fact of the Accessory being equipped with all its accompaniments is not so very necessary (as that of the primary), there would be nothing incongruous in the said deprival”.(See Ganganath Jha’s English translation of the Tantravartika, vol. 3 p. 1141).

35.The Gunapradhan Axiom can also be deducted from Jaimini 6:3:9, which states: “When there is a conflict between the purpose and the material, the purpose is to prevail, because in the absence of the prescribed material a substitute can be used, for the material is subordinate to the purpose”. ……..

36. In our opinion, the Gunapradhan principle is fully applicable to the interpretation of Rule 9(2). Rule 9(2) is subservient to Section 14. We must, therefore, interpret it in such a way as to make it in accordance with the main object that is contained in Section 14 of the Customs Act. It may be that in isolation Rule 9(2) conveys some other meaning, but when it is read along with Section 14 of the Act, it must be given a meaning which is in accordance with the object of Section 14. The object of Section 14 is ‘primary’ whereas the conditions in Rule 9(2) are the ‘accessories’. The ‘accessory’ must, therefore, serve the ‘primary’.” (Empasis supplied)

 

 

  1. In para 26 to 28, Hon’ble Supreme Court in case UNION OF INDIA Versus INTERCONTINENTAL CONSULTANTS AND TECHNOCRATS PVT. LTD.- 2018 (10) G.S.T.L. 401 (S.C.) [07-03-2018], repeated same principles.

    26. It is trite that rules cannot go beyond the statute. In Babaji Kondaji Garad ((1984) 2 SCC 50), this rule was enunciated in the following manner: “Now if there is any conflict between a statute and the subordinate legislation, it does not require elaborate reasoning to firmly state that the statute prevails over subordinate legislation and the byelaw, if not in conformity with the statute in order to give effect to the statutory provision the Rule or bye-law has to be ignored. The statutory provision has precedence and must be complied with.”
    27. The aforesaid principle is reiterated in Chenniappa Mudaliar-( (1969) 74 ITR 41) holding that a rule which comes in conflict with the main enactment has to give way to the provisions of the Act.
    28. It is also well-established principle that Rules are framed for achieving the purpose behind the provisions of the Act, as held in Taj Mahal Hotel ((1971) 82 ITR 44): “the Rules were meant only for the purpose of carrying out the provisions of the Act and they could not take away what was conferred by the Act or whittle down its effect.”

 

 

  1. Therefore, rule 47(5) is beyond the SEZ Act and has no jurisdictional legitimacy.

 

Section 28 of the Customs Act (Demand & Adjudication) notified since 2016:

  1. At the same time, it is interesting to note that section 28 of the Customs Act has been notified as a specified offence under section 21 and 22 of the SEZ Act, having Enforcement authority as Additional Director General, DRI (ADG), and jurisdictional Customs Commissioner and not any other authority. This is so specified vide 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, notification number dated 05.08.2016 and SO- 2666-E dated 5th 2016 and SO- 2667-E dated 5th August. 2016.

 

  1. Hence, despite section 28 of the Customs Act, a specified offence under SEZ Act, can only be enforced by ADG, DRI, and jurisdictional Customs Commissioner but nobody else, as specified authority under section 21 and 22 of the SEZ Act.

 

  1. Also interesting to note that, vide said notifications dated 05.08.2016, only the power of inspection, investigation, search and seizure has been given to the said ADG, DRI and jurisdictional Customs Commissioner and nothing else. Thus, even they also, has not been bestowed with any authority to raise demand notices and adjudicate them under said section 28 of Customs Act, read with Notifications dated 05.08.2016.

 

  1. Thus, it can be safely inferred that there is no legitimacy jurisdictional customs Commissioner and the ADG, DRI to issue demand notices and adjudicate them under the Provisions of SEZ Act read with the Customs Act.

 

Conflicting Court Rulings:

  1. The issue under examination got further complicated because of conflicting Court rulings.

 

Customs Official can issue demand and adjudicate:

  1. In case of UNION OF INDIA Vs OSWAL AGRICOMM PVT. LTD -2011 (268) E.L.T. 21 (Guj.) [06-07-2010], it was held that despite the absence of notifications under section 21,22 and 23 of the SEZ Act, customs authorities can seize and issue notices in SEZ as operation of customs act is not taken away.

“33. We have also notified that Section 53 of the SEZ Act has been given effect in regard to Kandla SEZ, Gandhi Dham with effect from 14-3-2006. From the date of such notification, the Kandla SEZ, Gandhi Dham is deemed to be a territory outside the customs territory only for the purpose of undertaking the ‘authorized operation’. That means the customs authority, who were empowered under Section 76G (repealed since 11-5-2007), has no power to authorise any developer to undertake any operation in the Special Economic Zone nor has the power to approve any proposal for setting up any unit within the Kandla SEZ.

34. But Section 53 being limited to that extent of ‘authorized officer’, who was earlier empowered to perform certain jobs under Chapter XA, the power of the Customs authorities under the Customs Act, including the power to confiscate and impose penalty under Sections 111 to 114, as enumerated in Chapter XIV of the Customs Act, is not taken away.

35. Thus, we hold that the competent authorities under the Customs Act are still empowered to confiscate any goods under Sections 111 and 112 and impose penalty under Sections 113 and 114, in appropriate case, even with regard to the units situated within the Special Economic Zone. The competent authorities are also empowered to take penal action under any other Central Act, if such violation is found to have been committed by any or other unit of SEZ including the writ petitioners, with regard to which no notification has been issued either under sub-section (1) or sub-section (2) of Section 21 or sub-section (1) or sub-section (2) of Section 22 of the SEZ Act, 2005.” (Emphasis is ours)

 

 

No authority to raise demand:

  1. In a 2022 judgement by the Hon’ble High Court for AP at Amaravati, in DIVINE CHEMTEE LTD. Vs PR. COMMISSIONER OF CUSTOMS- WP No. 13794/2020, decided on 5-5-2022-reported at -2022 (381) E.L.T. 476 (A.P.) , after analysing provisions of SEZ Act, especially section 51, 52, 53 and notification dated 05.08.2016 issued under section 22, ruled that Customs authorities (DRI officials) have no power or jurisdiction to inspect or seize goods in respect of units situated in SEZ area. The SCN in this case was issued in 2014, before rule 47(5) was inserted and notification dated 05.08.2016 under section 21 and 22 was issued. The relevant paras are reproduced,

“21. A reading of the above provisions makes it clear that the Customs authorities (DRI officials) have no power or jurisdiction to inspect or seize goods in respect of units situated in SEZ area. The power to investigate in respect of any offence committed in SEZ unit is conferred on Officers empowered under Section 22 of the SEZ Act.

 

  1. Further, Section 52 of the Act also spells out that the Customs Act is not applicable in respect of units situated in SEZ unit. It would be appropriate to extract Section 52 of the Act, which is as under:

“52. Certain provisions not to apply. – (1) The provisions contained in the Chapter XA of the Customs Act, 1962 (52 of 1962) and the Special Economic Zones Rules, 2003 and the Special Economic Zones (Customs Procedure) Regulations, 2003 made thereunder shall not, with effect from such date as the Central Government by notification appoint, apply to the Special Economic Zones. 23.

In exercise of power under Section 52 of the Act, the Central Government by its Notification dated 14-3-2006 declared that the provisions contained in Chapter XA of the Customs Act, 1962 shall not apply to Special Economic Zone.

  • …….. In fact, the judgments rendered by CESTAT (though not binding) would show that Officers of Customs have no jurisdiction to confiscate the goods and impose penalties in respect of SEZ unit. The two judgments of CESTAT in (1) Morgan Tectronics Limited v. Commissioner of Customs, New Delhi [ 2015 (316) E.L.T. 276 (Tri. – Del.)] and (2) Shri Imran Ahmed, M/s. Modern Metal Overseas, Mohd. Arif v. Commissioner of Customs, Central Excise & Service Tax, Hapur [2018 (8) TMI 431 – CESTAT ALLAHABAD = 2019 (370) E.L.T. 761 (Tri. – All.)], support the said proposition. It was informed by the Counsel that the ratio laid down in the above judgments has become final as it was not challenged by the department.” (Emphasis is ours)

 

 

  1. In case of MORGAN TECTRONICS LTD. Vs COMMISSIONER CUSTOMS, NEW DELHI, FO Nos. C/A/54422-54423/2014-CU(DB), dated 10-9-2014 in Appeal Nos. C/237-238/2010- reported at 2015 (316) E.L.T. 276 (Tri-Del.), for an issue where adjudication order was issued by Commissioner of Customs in the year 2010, it was held that said Commissioner has no such authority but the SEZ Authorities. The relevant para is reproduced,

  • “8. Moreover, in terms of the Section 53(1) of the SEZ Act, 2005, the SEZ is deemed to be territory outside the Customs Territory of India, and the goods imported were meant for the unit in SEZ Noida. In our view, the Commissioner of Customs, Air Cargo, New Customs House, New Delhi had no jurisdiction to confiscate these goods and impose penalty on the appellant and it is only the Joint/Dy. Commissioner/Asstt. Commissioner of Customs, in Noida SEZ unit, who had the jurisdiction to take necessary action. For this reason, also, the impugned orders are not sustainable.” (Emphasis is ours)

 

 

  1. Same ratio was maintained by Allahabad bench of the Hon’ble Tribunal in case of IMRAN AHMED Vs COMMR. OF CUS HAPUR- 2019 (370) E.L.T. 761 (Tri. -All) [26-07-2018], and para 4 is reproduced,

4. Considering the facts of the case are not disputed that the appellants are located in Special Economic Zone and having a license to import the impugned goods. Therefore, relying on the decision of the Tribunal in the case of Morgan Tectronics Ltd. v. Commissioner of Customs, New Delhi [ 2015 (316) E.L.T. 276 (Tri. -Del.)], wherein the Tribunal has observed as under:

“8……….……..”

We hold that the Customs officers have no jurisdiction on the appellant to seize the goods in SEZ area therefore seizure of the goods in question is set aside. Consequently, no demand can be confirmed against the appellants. Therefore, the confiscation of the impugned goods is also set aside.”

 

 

  1. The latest decision dated 19.02.2025 in case of M/s Prestige Polymers Pvt. Ltd., (CUSTOMS APPEAL NO. 51470 OF 2019) by Hon’ble CESTAT, Principal Bench, Delhi, (authored by Hon’ble Shri PV Subbarao-Member (T)) harps on the point that, Commissioner, customs will not have jurisdiction only to the extent of the authorised operations within the SEZ. For any un-authorised operation, it is the Customs Act, which will be applicable even in SEZ, with full force. The relevant paras are produced,

“20. Thus, section 51 read with section 53 of the SEZ Act makes it clear that to the extent of authorised operations, SEZ will be treated as outside the Customs territory of India- no more and no less. Thus, the Commissioner of Customs will not have jurisdiction only to the extent of the authorised operations within the SEZ. The words of both section 51 and 53 are fully in consonance with the object of the Act as is evident from its long title- to promote exports. SEZ cannot be treated as outside the Customs territory of India to carry on unauthorised operations and activities. In case of such activities, SEZ itself will be treated as Customs port, airport, ICD, etc. under section 7 of the Customs Act. Sub-section (2) of Section 53 makes this position explicit.”

 

 

  • But, the rationale in para 19 of this decision is quite strange, if it can be said so, with all humility, that ‘if the other laws are not inconsistent with SEZ Act, they will continue to be operational’. If the other laws are consistent (not inconsistent) with SEZ Act, then it is SEZ Act which will be in operation and no other laws. When there is NO inconsistency, why should/how can other law be permitted to be operational but SEZ Act. Para 19 is reproduced,

“19. Evidently, section 51 of SEZ Act does not negate all laws of the land within the SEZ. By virtue of section 51, SEZ Act overrides other laws only to the extent there is any inconsistency between the SEZ Act and other laws. If the other laws are not inconsistent with SEZ Act, they will continue to be operational.” (Emphasis is ours)

 

 

 

  • So, unless the SEZ Act itself prescribes the Authority, which can issue the demand notices and adjudications as per Customs Act, The Customs officials are not empowered to implement the Customs Act in the SEZ qua Authorised Operations, whether the goods/services are in the SEZ area or outside it. It is reiterated that rule in absence of specific provision in the Act, CAN NOT GIVE SUCH AUTHORITY.

 

  • It should also be brought to the notice of esteemed readers that section 20, 21 and 22 of the SEZ Act and notifications dated 05.08.2016, issued thereunder have not been taken into consideration in this decision of the Hon’ble Tribunal.

 

Conclusion:

  1. From the above detailed analysis of provisions of SEZ Act, especially Preamble, Section 20, 21, 22, 30, 51, 52 and 53, notifications issued there under, then Chapter XA of the Customs Act, rule 47 of the SEZ rules and various court rulings, it can be concluded that the jurisdictional customs Commissioner and ADG DRI have no power to raise demand notices and adjudicate them, in case of units/developers operating under SEZ for authorised operations. Even where the goods stand cleared to DTA from SEZ, these are to be governed by the provisions of the SEZ Act and not the Customs Act.
  2. The notifications specifying section 28 of the Customs Act as a notified offence can only be implemented by ADG DRI, and Jurisdictional Customs Commissioner, though they only have the power of Inspection, investigation, search and seizure and nothing more

 

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