Deciphering the Riddle - The Legitimacy of Imposing Export Duty on Supply of Goods from DTA to SEZ

[Pratik Trivedi]

Exploration

Navigating the intricate maze of legal complexities surrounding the imposition of export duties on the sale / supply of goods from the Domestic Tariff Area (DTA) to Special Economic Zones (SEZ) necessitates a meticulous examination of constitutional, statutory, and judicial dimensions. This article critically analyzes the misinterpretation of Rule 27(1) of the SEZ Rules, 2006, shedding light on the nuanced legal terrain by dissecting provisions of the Customs Act, 1962, the Customs Tariff Act, 1975, and the SEZ Act, 2005.

Foundations in the Constitution: Article 265 and Union List Entry No. 83

Embedded in the foundational principles of India, as articulated in Article 265, is a clear mandate that no tax shall be imposed or collected without the authority of law. Empowering the Central Government to levy customs duty, Union List Entry No. 83 establishes a symbiotic correlation between constitutional mandates and the Customs Act, 1962, emphasizing the legality and authority of customs duties.

Imposition of Customs Duties: A Deep Dive into the Customs Act, 1962

Section 12 of the Customs Act, 1962, intricately outlines the imposition of customs duties on goods imported into or exported from India. Section 12 reads as follows –

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 1 [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 [(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 fathom the scope of customs duties, a deep understanding of the definitions of crucial terms in the charging section, such as "Duties of Customs," "Goods," and "Export," as delineated in Sections 2(15), 2(22), and 2(18) of the Customs Act, 1962, respectively, is indispensable. The same are reiterated below for reference –

Section 2(15) “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, aircraft, and vehicles;

(b) stores;

(c) baggage;

(d) currency and negotiable instruments; and

(e) any other kind of movable property;

[Emphasis supplied…..]

A meticulous examination of these definitions elucidates 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.

Understanding Export Duties: Customs Tariff Act, 1975

Before delving into the debate surrounding DTA to SEZ transactions, an examination of Section 8 of the Customs Tariff Act, 1975, is paramount, and it reads as follows –

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 charge leviable thereon should be increased or that an export charge 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 charge leviable or, as the case may be, for the levy of an export charge, 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 augment or impose export duties under specific circumstances.

Contrary to misconceptions, the term "export" entails 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 transpires within India, and they are not exported from outside India. Hence, such transactions do not meet the criteria for exports, and consequently, no customs duties in the guise of export duties can be legitimately demanded for the sale of goods from DTA to SEZ.

Goods versus Services: A Clarification

It is paramount to emphasize 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 discourse. The imposition of export duty pertains exclusively to goods, and customs duties are not applicable to services. In the context of composite contracts or works contract services, where the supply of goods, such as steel, is integral to the service provided, the application of export duties becomes moot. Therefore, any discussion regarding the imposition of export duties should be restricted to transactions involving the movement of goods and should not be extrapolated to encompass services, which remain distinctly exempt from customs duties.

The discourse on export duties 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 duties. The nuances of these distinctions are essential to ensure a precise and legally sound discourse.

SEZ Regulations, 2006, and the Misinterpretation of Rule 27(1)

Rule 27(1) of the SEZ Regulations, 2006, seemingly implies the imposition of export duties on the sale of goods from DTA to SEZ, and it reads as follows –

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 types 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 the 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 the Board of Approval]

[Provided also that for the 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 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 the Board of Approval:

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

[Emphasis supplied…..]

However, the SEZ Act, 2005, which provides the legal foundation for the SEZ Regulations, does not confer the authority to levy customs duties. Moreover, Section 51 of the SEZ Act, 2005, which reads as follows, 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 duties on the sale of goods from DTA to SEZ erroneously assumes that Rule 27 of the SEZ Regulations, 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 adjudicated by the Gujarat High Court, supports the contention that no export duties are imposable 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 duties runs counter to the purpose of this legal fiction.

Unaltered 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 duties on the supply of goods from DTA to SEZ. The insertion of a proviso under Rule 27 of the SEZ Regulations, 2006, does not alter the legal position established by the Essar Steel Ltd judgment. Consequently, the law remains unchanged, and the demand for export duties on the sale of goods from DTA to SEZ lacks a legal foundation.

Conclusion: Navigating the Legal Labyrinth

In conclusion, the imposition of export duties on the sale of goods from DTA to SEZ is fraught with legal inconsistencies and misconceptions. By unraveling the intricate legal architecture 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 lack 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.