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November 15, 2021
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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The Special Economic Zone Act and the rules made thereunder allowed getting approval from the Authorities to form a unit in Special Economic Zone (‘SEZ’ for short) subject to terms and conditions to perform authorized operations in such unit.  The Unit is to fulfill its export obligations and the Net Foreign Exchange (‘NFE’ for short) shall be positive.  Rule 22(3) provides that the Unit shall submit Annual Performance Reports (‘APR’ for short) in the Form I, to the Development Commissioner and the Development Commissioner shall place the same before the Approval Committee for consideration.

The proviso to Rule 25 provides that if there is a failure to achieve positive net foreign exchange earnings, by a Unit,  such entrepreneur shall also be liable for penal action under the provisions of Foreign Trade (Development and Regulation) Act, 1992 and the rules made there under.

The performance of the Unit shall be monitored by the Approval Committee.   In case the Approval Committee come to the conclusion that a Unit has not achieved positive NFE or failed to abide by any of the terms and conditions of the Letter of Approval or Bond-cum-Legal Undertaking, without prejudice to the action that may be taken under any other law for the time being in force, the said Unit shall be liable for penal action under the provisions of the Foreign Trade (Development and Regulation) Act, 1992.

In TREZZA JEWELS LLP VERSUS UNION OF INDIA & ORS. [2021 (7) TMI 781 - BOMBAY HIGH COURT] the petitioner is a Limited Liability Partnership engaging in the business of import, manufacturing and export of jewellery from its units situated in Santacruz Electronic Export Processing Zone, Special Economic Zone, Andheri (East), Mumbai.  The petitioner was given approval for manufacture and export of studded gold jewellery with CPD and polished diamonds/precious and semi-precious stones/silver gold under SEZ scheme for a period of 5 years from 01.04.2010 to 31.03.2015. 

For getting approval the petitioner projected export turnover of US$ 1,31,30,430 and NFE  earnings of US $ 83,48,910.  The approval was given to the petitioner subject to the following conditions-

  • The petitioner shall export goods as per SEZ Act and rules made there under for 5 years and for this purpose the petitioner shall executive a bond-cum-legal undertaking.
  • The petitioner shall achieve positive NFE failing which the petitioner shall be liable for penal action under the Act.

The petitioner could not comply with the conditions of the approval given to it.  A show cause notice dated 24.06.2015 was issue to the petitioner alleging the following-

  • There was less activity in the unit of the petitioner and there was no export six months prior to the issuance of show cause notice.
  • On the visit of the officers the unit was found to be locked.
  • The Unit was in a dilapidated condition.
  • None of the machines were found to be in working conditions.
  • Manufacturing was stopped long back.
  • CAD machines imported by the petitioner were not found in the premises.
  • The said machines were sold to another company for less value.
  • The petitioner had not achieved even 1% of its projection.
  • The NFE was found in the negative for the previous 4 years of the block period.
  • The petitioner breached the provisions of Rule 22(3), 25, 54(1) and 54(2) of SEZ Rules.
  • The petitioner was carrying forward cumulative NFE of the earlier block in the APR to the current block so as to show positive cumulative NFE, thus violating the provisions of Section 11(2) of SEZ Act.
  • The petitioner had not fulfilled its obligation on the export turnover and of the NFE as promised and had furnished APR’s giving incorrect information.

The petitioner gave reply to the show cause notice as detailed below-

  • Negative NFE was happened due to the amortization of capital goods.
  • The petitioner had total space of 2000 sq.ft. and it was difficult for the petitioner to install all the machineries and make arrangements for the employers to work.
  • Job workers were engaged for manufacture of jewelleries.
  • The market had accepted Chinese products which affected the production of jewelleries.
  • The projections were made in the anticipation and on the basis of market expectations.  However everything went wrong  due to recession and heavy global competition and therefore the petitioner could not able to meet the obligations.

The original authority observed that the performance of the petitioners was very disappointing as the petitioner had not achieved exports of even 1% of the projections and that the NFE was negative in all four years and gave misleading information.  Therefore the original authority imposed penalty of ₹ 5 lakhs on the petitioner under Section 11 of the Foreign Trade (Development and Regulation) Act.  The Authority also directed to file fresh APR for the year 2012-13. 

The petitioner filed an appeal before the Appellate Authority.  The Appellate Authority rejected the appeal of the petitioner since the petitioner had not achieved positive NFE as mandated.  The petitioner, thereafter, approached the Review Committee. Before the Review Committee the petitioner submitted the following-

  • The appellate order is to be suitably amended so as to grant parity to the petitioner qua the amount of penalty as imposed.
  • The penalty amount may be lessened.

The Review Committee observed that the appellant had admitted that NFE for the years 2010-11, 2011-12, 2012-13 was in the negative and the petitioner did not reflect the sale of CAD machine in the APR for the year 2011-12.  The Review Committee rejected the review application filed the petitioner.

Being aggrieved by the order of Review Committee the petitioner filed the present writ petition before the High Court.  The petitioner submitted the following before the High Court-

  • The very foundation of the proceedings in issuing the show cause notice was without any basis inasmuch as that the authorities ought to have awaited for the entire block period from 2010-11 to 2014-15 to be over and only at the end of the block period, if such authority was of the opinion that the petitioner had not achieved the positive NFE as prescribed under SEZ Rules, 2006.
  • The Authority had taken into consideration the NFE’s for the period 2010-2011 to 2013 – 2014 (four years) and not the full period of 5 years.
  • Such approach of the Authority would be required to be held contrary to Rule 53 of SEZ Rules which provides that the unit shall achieve positive NFE to be calculated cumulatively for a period of five years.
  • The amount of penalty is unreasonable and a lesser penalty ought to have been awarded.
  • The petitioner could not achieve positive NFE due to a setback in the market conditions.

The Authority submitted the following before the High Court-

  • The petitioner’s contention in regard to the block period of five years to be taken into consideration relying on Rule 53 for issuance of show cause notice is raised for the first time in the present proceeding, which was not the petitioner’s case before any of the authorities below.
  • Considering the provisions of Rule 53 read with conditions of letter of approval, the contentions as urged on behalf of the petitioner are untenable.
  • Apart from the non compliance of the mandatory conditions as prescribed under SEZ Rules and the letter of approval, the petitioner has also misled the authorities in not supplying correct information.

The Authority prayed for the dismissal of the writ petition.

The High Court considered the submissions of the parties to the writ petition.  The High Court did not accept the contentions of the petitioner that the entire block period of 5 years ought to have lapsed and only then a show cause notice should have been issued for the entire period, for non fulfilling the NFE conditions.  Annexure I framed under Rule 54 prescribes that a show cause notice can be issued if the unit continues to be NFE by the end of 3rd year and if the negative performance continues in the 5th year, the Development Commissioner is entitled to initiate penal action under Rule 25.  This contention had not been advanced by the petitioner before the authorities below.  The show cause notice was issued to the petitioner only after the completion of 5 years block period which came to an end on 31.03.2015 as the show cause notice itself was issued on 24.06.2015.  The petitioner was well aware of the statutory obligations failing which the petitioner was liable to penal action.  The NFE of the petitioner was admittedly in the negative at -1.55, -9.92 and 0.14 totaling into a negative NFE of -13.16.  Once the terms and conditions as prescribed in the letter of approval were accepted by the petitioner, there cannot be any argument contrary to such terms and conditions.

The High Court was satisfied that the authorities below in passing the impugned orders have appropriately considered the facts of the case and the record and by applying the law in its proper perspective have negativated the petitioner’s case.  Further the petitioner has failed to show any perversity in the findings as recorded by the authorities.  The High Court rejected the petition.


By: Mr. M. GOVINDARAJAN - November 15, 2021



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