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.

Goa Govt. to invoke 111 year old Act: so whats the news?

This news-item comes really as a shock to me; shock because this can be news at all. To give you the background anyways, rediff reports that the Goa Government is planning to invoke a 111 old law to denotify the SEZs already notified by the Central Government under the Special Zones Act, 2005.

So why a shocker? Shocking because any law student can tell you that this 111 year old Act, namely the 'General Clauses Act, 1897' is one of the most frequently invoked legislation and the mother of last resorts for interpretation of statutes (enactments of Act i.e.). This archaic, yet breathing and relieving provision has been the lifeline for many of us who have been unable to find a satisfactory answer to how laws should be interpreted and comes to rescue for us all the time. Any one acquainted with law as a formal subject would have surely heard of this legislation and must also have referred to this really small piece of legislation atleast once in life time.

Brought into vogue in 1897 (to consolidate the principles under the 1868 and 1887 Acts with the same name) this Act is the mother of statutory interpretation rules in India. Similar to the Interpretation Act, 1978 of the UK, the Act of 1897 lays down the rules of how and in what manner statues have to be interpreted (so much so that Justice G.P. Singh has written an entire treatise on it, which has been a best-seller in legal circles in India and one of the most referred book by the Supreme Court in recent times). This Act of 1897 carries a number of definitions under Section 3 which most of us (in legal profession or otherwise) employ but for which the exact and formal definition lies only in this 1897 Act. The most prominent of these include terms such as 'affidavit', 'document', 'enactment', 'good faith', 'government securities', 'immovable property', 'local authority', 'movable property', 'offence', 'person', 'registered' (in respect of a document), 'will', etc. While most of us commonly employ these terms, we do not know that their genesis, in the context of legal expression in India, lies in the General Clauses Act, 1897, which rediff very ignorantly defines as a '111 year old law'.

These specific sections of the Act are devoted to other rules of interpretation. For example most of us know that a bill becomes a law and comes into force when it is signed by the President. Our Civics books have told us that. Asked to guess where from this rule comes, most of us would say from the Constitution (which was adopted in 1949). But then they are wrong for the source of this rule is much older and Section 5 tells us originally central enactments came into force when the Governor General signed on them and it has been amended to change the name to the President. Thus this enactment is the source of this rule with which most of us are aware of but ignorant to its source.

Similarly, entailing the various legal concepts, Section 9 sets the rule regarding the commencement and termination of the time for the operation of the statute. Section 7 deals with situations in which there is revival of repealed statutes; Section 10 pertains to computation of time (for purposes other than that under the Limitation Act, 1963), Section 11 deals with (and I agree, quiet funny, nonetheless relevant) the calculation of distance. It states, "In the measurement of any distance, for the purposes of any Central Act or Regulation made after the commencement of this Act, that distance shall, unless a different intention appears, be measured in a straight line on a horizontal plane."

Then an important (for lawyers though) is Section 13 which deals with gender and number. It states "in all Central Acts and Regulations, unless there is anything repugnant in the subject or context, (1) words importing the masculine gender shall be taken to include females; and (2) words in the singular shall include the plural, and vice versa." I myself was not aware that the often cited rules originated from this 1897 Act for law during law school. But that since I realized this source, I am a fan of this 1897 Act.

There are many other important rules but of those I will discuss just one more; Section 6. This Section 6 is a rule of interpretation, which has an entire area of jurisprudence built upon it. It deals with the 'repeal of statutes' and the effects of such repeal. Very relevant in case of statutes dealing with criminal offence and the effect of repeal of such statutes (the most prominent cases in this area have been with respect to TADA (Terrorist And Disruptive Activities (Prevention) Act) and MISA (Maintenance of Internal Security Act). There have even been cases involving huge financial stakes (the one I have personally been a part of dealt with the repealed Sick Industrial Companies Act (or SICA)) which have called no less than the Supreme Court to interpret the provision of this 1897 Act. Though the interpretation on that regard is fairly settled (by a five judge constitutional bench of the Supreme Court) nonetheless a number of cases play reliance on this Section 6 and thus the principles embedded gain prominence.

As for the news why rediff cites this, is Section 21 of the Act which simply states that the power to issue notification also includes the power to revoke it. This implies the law makers as long back as more than 100 years conceived a situation wherein there would be enactments which would only give the power to notify and fail to mention anything about power to revoke, something which has exactly happened in the 2005 SEZ Act. This Act only vests the power of notifying a 'Special Economic Zone' on the Central Government. There is no mention about revoking a notification constituting an SEZ (perhaps the Government thought they would not need to de-notify one). But now that the Goa Government finds establishment of SEZs in Goa as contrary to their political agenda they seek to delimit and revoke these SEZs which have been notified to be established in Goa. To this the Secretary to Government of India responsible for notification of SEZs has the simple answer that there is simply no procedure for revoking a notification establishing and SEZ and so nothing can be done for those already brought into existence under the 2005 Act.

I am sure, it could only have been a legal brain to divert the attention of the Goa Government to bring to the notice of the Central Government this Section 21 of the General Clauses Act, 1897 whereby the power to issue notification being conferred upon the Central Government for formation of SEZs also implies that it also carries with it the power to de-notify them. Quiet simple though, but takes a legal provision to do so. And that is what Section 21 exactly does.

So there is nothing funny about that rediff, just get your facts right.