From SEZ to DTA framework: A taxman clarifies the law interpreted by the Supreme Court

The Supreme Court (SC) has earlier this month propounded a critical position of law regarding Special Economic Zones (SEZ’s). While this has got media attention because of the names of the appellant and the senior counsel appearing for them, the news coverage mostly missed the real issues involved.

The SC debated on whether customs duty was leviable on electrical energy generated in a power plant located within a SEZ when supplied to domestic tariff area (DTA). The SC ruled that in the circumstances of the matter at hand, it was not and ordered refund of duty paid. The decision has large implications and the Central Board of Indirect Taxes (CBIC), and the Ministry of Commerce (MoC) will do well to take note of its import.

 

SEZ’s were conceived to be ‘engines of ‘economic growth, supported by quality infrastructure with minimum possible regulations. As the preamble to the SEZ Act 2005 states the Act aimed to provide for the establishment, development and management of SEZ’s for the promotion of exports. The incentives available to units in SEZ’s range from duty free import/domestic procurement of goods, 100% income tax exemption for the first 5 years, exemption from minimum alternate tax to make exports competitive. As of now, there are 276 functional SEZ’s in the country out of the 419 approved. Though there have been concerns whether the SEZ’s have become land grabbing entities, exports in 2024-25 touched as high as US$ 172 billion. 

The corollary of the duty-free incentives extended was that the goods, when cleared from an SEZ into the domestic tariff area (DTA), were treated as if they had been imported into the country. They were to be chargeable to duties of customs. Section 30 of the SEZ Act makes this explicit. To paraphrase the section any goods removed from a SEZ to the DTA are ‘chargeable to duties of customs including anti-dumping, countervailing and safeguard duties under the Customs Tariff Act, 1975’, where applicable, as leviable on such goods when imported and at the rate of duty and tariff valuation as on the date of such removal.  

The item involved in the SC matter was electricity which was generated in the SEZ and substantially supplied to the DTA. In relation to electricity Rule 47 (3) of the SEZ rules while reiterating the principle of duty to be charged for DTA clearance, stipulates that where duty free inputs have been used in the generation of electricity which is cleared to the DTA, customs duty will have to be paid on that portion of the duty-free inputs used in the electricity.

In 2010 a customs notification was issued in terms of Sec 25 of the Customs Act (CA) imposing customs duty on electrical energy cleared from an SEZ to the DTA. Duty was imposed retrospectively from 2009. This was challenged by the appellant in the High Court which granted interim relief-DTA clearance was permitted on furnishing of a bank guarantee. In the interim yet another notification was issued thereafter again under Sec 25 imposing a levy of 16% for the subsequent period subsequently amended prescribing a three paise per unit rate. It must be noted that Sec 25 grants the Central Government the power to when in the public interest to exempt the duty levied-either wholly or in part. 

The issue related to the retrospective imposition was challenged and decided by the High Court (HC) in 2015. The HC inter alia held that an SEZ while fiscally distinct is not a foreign territory. It opined that the legal fiction of Sec 30 of the SEZ Act (‘as if imported’) does not convert intra-national supply of electricity into an act of import; that for an event to attract import duty the provisions of Sec 12 of the CA would be relevant. This section of the CA is the ‘charging’ section which stipulates that duties of customs can be levied on goods imported into or exported from India.

The HC further held that Section 25 of the Act does not empower the government to impose duty but only exempt. The HC also questioned the power to impose a duty retrospectively. The HC also held that there was an unfair double burden in so far as the SEZ Rules had imposed a condition that the benefit of duty-free inputs should be recovered — thus again charging duty on electricity would mean being subjected to customs incidence twice. The benefit was given to the appellant. 

The issue of the subsequent prospective levy was then challenged in the backdrop of the 2015 decision — the HC in a 2019 decision held that it was not necessary to extend the benefit of the ‘protective declaration’ of 2015 to the later period-in other words DTA clearances of electricity from an SEZ were subject to payment of duty. 

It was this decision which was under challenge before the SC. The Apex Court has affirmed the findings of the HC in the 2015 judgement, noting with satisfaction that ‘the decision went to the very root of the taxing power’ and that it was also applicable to the subsequent notification which sought to impose duty prospectively. The Apex Court’s observations has reaffirmed that Sec 30 of the SEZ Act’s intent was to maintain parity between goods imported and goods cleared from a SEZ. It has also confirmed that the Central Government cannot through Section 25 of the CA which provision assumes there is a duty to exempt or reduce, to impose duty. The Court has termed this as an ‘inversion’- a provision designed to grant relief has been inverted to impose duty. 

The Apex Court’s decision needs a careful study by the authorities concerned to ensure that in future there is no gap between intention and law; if the intention is to charge duty on such DTA clearances than it must be done under the charging section and not the exemption route. SEZ’s are deemed to be little pockets of foreign territories within the country — which is why conversely clearances from DTA to the SEZ are deemed to be exports.

The other observation that once the requirements of Rule 47(3) of the SEZ Rules which obliges the SEZ unit to neutralise customs duty foregone on the inputs when cleared to the DTA has been fulfilled, no ‘additional’ customs duty can be imposed on the final product itself when cleared to the DTA, would also need to be examined by the authorities. Are the two requirements distinct: one on the inputs, the other on the final product? If the stated position is that there should be parity between clearances from an SEZ unit to the DTA and imports or clearances from a DTA unit, is that parity is lost with this proposition? 



—The author, Najib Shah is former chairman, Central Board of Indirect Taxes & Customs. The views are personal.