SEZ a part of India: High Court

In a recent decision the Gujarat High Court has held that Special Economic Zones (SEZ) are a part of India. The High Court allowed the writ petitions challenging the levy of export duty on goods supplied by domestic Indian units to unit situated in SEZ wherein the taxation department argued that SEZ being "deemed to be a territory outside the customs territory of India, levy of export duty on a Domestic Tariff Area unit, which supply goods into Special Economic Zone cannot be claimed to be outside the scope, authority and jurisdiction to levy export duty on a unit in Domestic Tariff Area.

The petitioners, however, argued that "that the supply of goods from a DTA unit to a SEZ unit being a supply of goods within the territory of India, no export duty is leviable under the provisions of Section 12 of the Customs Act, 1962 since such duty can only be imposed in respect of goods which are to be taken out of India to a place outside India. The levy of export duty under Section 12 is attracted only if the goods are exported from India. Since SEZ is located within India, the supplies to the SEZ cannot be considered as goods  exported from India. ... The Unit located in a SEZ is one located within India and, therefore, supplies made to such a Unit cannot be considered as goods  exported from India." It was also argued by the SEZ units that "the levy of export duty on supplies made to a SEZ Unit is clearly contrary to Rule 27 of the SEZ Rules, 2006, which entitles a SEZ Unit to procure goods from the DTA, without payment of duty, taxes or cess. It is further contended that the statement of objects and reasons which were presented before the Parliament, when the SEZ Act was introduced clearly states that the objective of creating a Special Economic Zone was to make available goods and services  free of taxes and duties for promoting export-led growth. It is in consonance with this stated objective that the SEZ Act does not provide for any levy on export of goods or movement of goods from Domestic Tariff Area to SEZ and the SEZ Rules clarify that all supplies to a SEZ Unit will be  without payment of duty, taxes or cess."

Giving an account of the statutory provisions and rules made thereunder, the Revenue Department retorted back contending that "there is no exemption from levy of customs duty for the goods supplied from a Domestic Tariff Area to a unit in SEZ. The term exported and exportation out of India have also been used in Rules 18 and 19 of the Central Excise Rules, 2002 and the notifications issued thereunder, whereby rebate of Central Excise Duty paid on the goods and their raw materials is granted on supplies by Domestic Tariff Area units to Special Economic Zones. If a view is taken that export implies only export out of India, then supplies to SEZs from DTA would not be export out of India, and therefore, no rebate under these Rules would be admissible. The petitioners are claiming rebate on the suppliers made by them to Special Economic Zone units on the ground that the supplies made by the DTA unit to SEZ unit are exports. He has, therefore, submitted that the petitioners apart from their conduct are disentitled to contend that the activity of supply of goods from DTA to SEZ is not export and consequently the challenge in the petition deserves to be turned down in view of the stand taken by the petitioners themselves while claiming rebate as regards the duty of excise levied while the DTA units are supplying goods to SEZ units and are themselves exports for the purpose of Rules 18 and 19 of the Central Excise Rules, 2002. He has, therefore, submitted that supplies from DTA to SEZ are eligible for various export benefits such as drawback, DEPB or towards fulfillment of advance license obligations, etc. If these supplies from a place in India to another place in India are not treated as export, such benefits would not be admissible. He has, therefore, submitted that the combined reading of all these provisions leads to a conclusion that supplies made by a DTA unit to units / developers in SEZ are to be treated as exports and they do not enjoy any exemption from export duty."

The High Court, however, was not impressed. It observed that "the taxable event contemplated under the Customs Act, 1962 for the purpose of levy of Export Duty is taking the goods out of the territorial waters of India to a place outside India, in which case the goods would be dutiable goods as contemplated under Section 12 of the said Act and attract levy of export duty, to be paid at the time of exportation of such goods. Export under the Customs Act, 1962, therefore, can be said to have taken place only upon movement of the goods outside the territorial waters of India." The High Court, therefore, declared as under;

The provisions of the SEZ Act do not envisage the movement of goods from the Domestic Tariff Area to the Special Economic Zone to be a taxable event as the said provisions do not contain any charging provision providing for the levy and imposition of Export Duty, and the said Act does not contain any provisions for recovery of such duty. In construing fiscal statutes and in determining the liability of a subject to tax one must have regard to the strict letter of the law and not merely to the spirit of the statute or the substance of the law. If the revenue establishes that the case falls strictly within the provisions of the law, the subject can be taxed and if, on the other hand, the case is not covered within the four corners of the provisions of the taxing statute, no tax can be imposed by inference or analogy or by trying the probe into the intention of the legislature and by considering what was the substance of the matter.

The contention that levy of Export Duty is impliedly contemplated under the SEZ Act, principally on account of the fact that unlike other levies, the levy of Export Duty has not been specifically exempted under the provisions of the said Act, is wholly misconceived. In the first place, as stated above, there cannot be a levy of tax by implication. Secondly the necessity for exemption would arise if the subject is liable to tax in the first place. In any case an overall view of the provisions of the SEZ Act and the Rules would establish that levy of Export Duty on the movement of goods from the Domestic Tariff Area to the Special Economic Zone is not at all provided for or contemplated thereunder ...

The movement of goods from the Domestic Tariff Area to the Special Economic Zone has been treated as export by a legal fiction created under the SEZ Act, 2005. A legal fiction is to be restricted to the statute which creates it. Reference is made to the decisions of the Apex Court in the case of State of West Bengal V/s. Sadan K. Bormal and another, (2004) 6 SCC 59, Meghraj Biscuits Industries Limited V/s. Commissioner of Central Excise U.P., (2007) 3 SCC 780, MORIROKU UT INDIA (P) LIMITED V/s. State of Uttar Pradesh and others, (2008) 4 SCC 548. Moreover, such legal fiction should be confined to the purpose for which it has been created. Reference is made to the decisions of the Apex Court in the case of State of Karnataka V/s. K. Gopalakrishna Shenoy and antoher, (1987) 3 SCC 55; Mancheri Puthusseri Ahmed and others V/s. Kuthiravattam Estate Receiver, (1996) 6 SCC 185. As stated above, such movement has been treated as export under the SEZ Act 2005 for the purpose of making available benefits as in the case of actual exports like duty drawback, DEPB benefits, etc. to the Special Economic Zone Unit / Developer or the Domestic Tariff Area supplier at their option. Construing this movement of goods as entailing a liability of payment of duty runs absolutely counter to the purpose of the legal fiction created under the SEZ Act, 2005.

The High Court then went on to hold that the SEZ territory was very much a part of India and the argument of the Taxation department was not correct in law. The High Court declared as under;

reliance on Section 53 of the SEZ Act 2005 to contend that a Special Economic Zone is a territory outside India, is misconceived. Section 53 provides that the Zone would be deemed to be a territory outside the customs territory of India for the purposes of undertaking the authorized operations. The term customs territory cannot be equated to the territory of India and in fact, such term has been defined in the General Agreement of Tariffs & Trade, to which India is a signatory, to mean an area subject to common tariff and regulations of commerce and that there could be more than one customs territory in a country. Moreover such an interpretation would lead to a situation where a Special Economic Zone would not be subject to any laws whatsoever. The entire SEZ Act 2005 would be rendered redundant since it is stated to extend the whole of India. In any case, various provisions of the SEZ Act would be rendered redundant and unworkable if the Special Economic Zone was to be considered an area outside India. This is apart from the fact that such a declaration would be constitutionally impermissible.

Have a look at the decision.