Levy of Export Duty on sales to SEZ - A convoluted saga

 

Rohan Muralidharan, Joint Partner & Derlene Joshua, Associate, Lakshmikumaran & Sridharan

 

The Government has recently levied 15% export duty on select steel products.[1] Adding to the woes of steel companies, the Noida Special Economic Zone has issued Trade Notice No. 01/2022 dated 03.06.2022 to 'clarify' that export duty is applicable on supply of steel from Domestic Tariff Area ("DTA") to Special Economic Zone ("SEZ") Unit/Developer and provides for the procedure to pay such duty. These developments have resurrected the vexed question of whether export duty is payable on supplies of dutiable goods from DTA to SEZ. This Article will examine the arguments favouring both assessees and the Department on said question and discuss the way forward for taxpayers.

 

'Export duty' is a 'duty of customs' levied under Section 12 of the Customs Act, 1962 read with the second schedule to the Customs Tariff Act, 1975 on goods exported from India. Under Customs law, 'export' has been defined to mean taking out of India to a place outside India[2], whereas 'import' has been defined to mean bringing into India from a place outside India.[3] Thus, under the Customs Law export duty is payable only when the goods are taken out of India.

 

The Argument

Section 53 of the Special Economic Zones Act, 2005 ("SEZ Act") has created the legal fiction by virtue of which SEZ is a territory outside the customs territory of India for the purposes of undertaking the authorised operations. However, Courts have held that the said legal fiction is only for a limited purpose and that an SEZ is not a territory which is located outside India.[4] Therefore, a view is possible that any supply to an SEZ will not constitute as an export under the Customs Law which provides for the levy of export duty. Various High Courts have adopted said view and have held, in favour of assessees, that export duty is not leviable on supply from DTA to SEZ.[5]

 

At this point, it is relevant to note that the power to levy import duties on clearances from SEZ to DTA is not merely on account of the legal fiction under Section 53. Rather, the said power is pursuant to Section 30 of the SEZ Act which provides that 'goods cleared from SEZ to DTA would be chargeable to duties of customs as leviable on such goods when imported'. The SEZ Act does not have any similar provision providing for the levy of export duty on clearances of dutiable goods from the DTA to SEZ. Notwithstanding the absence of an enabling provision under the SEZ Act, the fifth proviso to Rule 27 of the SEZ Rules, 2006 (extracted below) provides for the levy of export duty on clearances from DTA to SEZ.

 

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

 

The above extracted proviso has been inserted vide Special Economic Zones (Amendment) Rules, 2018[6] to overcome the various High Court decisions in favour of assessees which have held that export duty is not leviable on sale of dutiable goods from DTA to SEZ.[7]

 

It is a settled legal principle that no tax can be imposed by any bye-law or rule or regulation or notification unless the statute under which the subordinate legislation is made specifically authorizes the imposition.[8] Keeping in mind said principle, a view is possible that in the absence of an express enabling provision under the SEZ Act, fifth proviso to Rule 27 of the SEZ Rules, on its own or even if it is read with the legal fiction under Section 53 of the SEZ Act, is not sufficient to sustain the levy of export duty under Customs Act or the SEZ Act on sale of dutiable goods from DTA to SEZ.

 

While the views discussed thus far have been in favour of the assessees, there are some arguments available to justify the vires of the levy of export duty on sale of dutiable goods from DTA to SEZ!

 

The Counter-Argument

Even though Customs law has defined 'export' to mean taking out of India to a place outside India, Section 2(m)(ii) of the SEZ Act has defined 'export' to inter alia mean supplying goods or providing services from the DTA to a unit or developer. Further, Section 51 of the SEZ Act provides that SEZ provisions shall have an overriding effect in case there is anything inconsistent contained in any other law.

 

On the basis of the above provisions, a view is possible that the levy of export duty under Section 12 of the Customs Act is backed by the overriding effect of Section 51 of the SEZ Act read with definition of 'export' under SEZ Act. To further elaborate, the definition of 'export' under SEZ Act would prevail over the definition of the term under the Customs Act when there is a transaction between a Domestic Tariff Area unit and Special Economic Zone - a transaction governed by SEZ Act which provides for the overriding effect of SEZ provisions in case of any inconsistencies with other laws. Thus, any goods sold from DTA to SEZ will be treated as 'export' under SEZ Law and will be leviable to export duty under Rule 27 of SEZ Rules.

 

The above argument was rejected by the Division Bench of the Gujarat High Court in Essar Steel v. Union of India on the reasoning that the term 'export' having been defined under Customs Act for the purposes of that Act, there is no question of adopting the meaning of the said term under another enactment for the purpose of levying duty under the Customs Act. On the other hand, in the context of allowing export benefits to DTA suppliers, the above argument was accepted by the Chhattisgarh High Court in Union of India v. Steel Authority of India Ltd - 2013-VIL-17-CHG-CE.

 

Way Forward for taxpayers

Even though various High Courts have held in favour of the assesses that export duty is not leviable on supply from DTA to SEZ, the question of whether export duty is leviable on sale of dutiable goods from DTA to SEZ has not attained finality before the Supreme Court. As on date, Department's appeal against all the High Court decisions in favour of the assessees are pending before the Supreme Court.[9] Further, Courts are yet to examine the vires of the levy of export duty under the SEZ law post the insertion of the fifth proviso to Rule 27 of the SEZ Rules.

 

It is interesting to note that the issue under analysis in this Article was once regarded as settled by the Supreme Court on account of the dismissal of Department's SLPs against the favourable High Court decisions. However, pursuant to the Department's relentless efforts - by amending SEZ Rules and earnestly pursuing the review petition against the Supreme Court's dismissal of SLPs (which eventually got allowed on 10.02.2020[10]), the issue is no longer settled!

 

It is reasonable to state that litigation on this issue would continue for some years before reaching any finality. Therefore, taxpayers are required to independently assess the frequency of their supplies of dutiable goods to SEZs and take a stand on whether they would pay the export duty on supply of dutiable goods from DTA to SEZ or choose to litigate the matter.

 

[Date: 16/08/2022]

 

(The views expressed in this article are strictly personal.)