The Customs, Excise & Service Tax Appellate Tribunal has clarified that supplies to Special Economic Zone units are exempt from customs duty under the SEZ Act, 2005, rendering any demand for duty, interest, or penalty unlawful in the absence of proof that the goods were not used for authorized operations. This ruling reinforces the statutory immunity granted to SEZ units and imposes strict procedural limits on penalty imposition.
Background & Facts
The Dispute
The appellant, Shri Siddharth Jain, proprietor of M/s. Manglam Steel, Ratlam, was assessed for customs duty, interest, and penalties by the Commissioner of Customs, Indore, in an order dated 31.07.2019. The department alleged that the appellant had clandestinely supplied 1986.366 metric tonnes of MS Scrap to M/s. New Tech Abrasive Ltd. (NTAL), a unit located within the Indore Special Economic Zone, without payment of customs duty. The department further alleged that payments were received mostly in cash.
Key Facts
- M/s. New Tech Abrasive Ltd. (NTAL) is a registered unit operating within the Indore Special Economic Zone.
- The department issued a show cause notice dated 24.08.2012 alleging clandestine removal of MS Scrap from NTAL’s premises and supply by the appellant.
- The department relied on seized documents: a ledger from the room of Ganpat Singh, a machine operator at NTAL, and computer printouts from NTAL’s premises, obtained via panchnama dated 29.11.2010.
- No independent evidence was produced linking the appellant to the alleged supply, including no purchase records from the appellant’s suppliers or delivery receipts.
- The appellant denied any supply of MS Scrap to NTAL and challenged the evidentiary basis of the notice.
- The department proposed a customs duty demand of Rs. 72,11,515/- under the proviso to Section 28(1) of the Customs Act, 1962, along with penalties under Sections 114 and 114AA.
Procedural History
- 24.08.2012: Show cause notice issued by Commissioner of Customs, Indore.
- 31.07.2019: Commissioner’s order confirmed duty demand of Rs. 72,11,515/-, penalty of Rs. 72,11,515/- under Section 114, and penalty of Rs. 72,11,515/- under Section 114AA.
- 19.05.2026: Appeal filed by appellant before CESTAT, New Delhi, Principal Bench.
- 28.01.2026: Hearing conducted before the Tribunal.
- 19.05.2026: Final order passed allowing the appeal.
The Parties' Positions
For the Appellant
- No evidence established that the appellant supplied MS Scrap to NTAL.
- Reliance on third-party records (NTAL’s ledger and computer data) without corroboration is legally insufficient.
- The department failed to investigate the appellant’s sources of procurement of MS Scrap.
- Supply to an SEZ unit is exempt from customs duty under the SEZ Act, 2005.
- Penalty under Section 114AA was imposed without being proposed in the show cause notice, violating principles of natural justice.
For the Respondent
- The seized documents and cash transaction patterns established a prima facie case of clandestine supply.
- The appellant’s denial was unsubstantiated and did not rebut the department’s evidence.
- Penalties were justified due to the magnitude of alleged evasion.
Relief Sought
The appellant sought:
- Setting aside of the demand for customs duty of Rs. 72,11,515/- and interest.
- Quashing of penalty of Rs. 72,11,515/- under Section 114.
- Quashing of penalty of Rs. 72,11,515/- under Section 114AA.
- Declaration that the order was ultra vires the SEZ Act and violative of natural justice.
The Legal Issue
The central question was whether customs duty is leviable on goods supplied to a Special Economic Zone unit under the SEZ Act, 2005, and whether penalty under Section 114AA can be imposed when not proposed in the show cause notice.
Arguments Presented
For the Appellant
The appellant’s counsel, Ms. Surbhi Sinha, relied on the binding precedent in Cummins Turbo Technology v. Commissioner of Customs, Central Excise & Central Tax, Indore (2023) 12 Centax 334 (Tri.-Del), which held that the charging provisions of the Customs Act are overridden by the SEZ Act, 2005. She argued that Section 26 of the SEZ Act grants immunity from customs duty for goods supplied for authorized operations of SEZ units. She further contended that the department failed to discharge the burden of proving clandestine supply, as no direct evidence linked the appellant to the transaction. She emphasized that Section 114AA penalties require prior notice and cannot be imposed ex parte.
For the Respondent
Shri Ajay Jain, Special Counsel for the Department, argued that the seized records from NTAL’s premises, including ledger entries and computer printouts, constituted sufficient evidence of the appellant’s involvement. He contended that the nature of the transaction - large-scale cash payments and absence of documentation - indicated evasion. He maintained that the penalty under Section 114AA was justified as a deterrent and that the appellant had ample opportunity to respond.
The Court's Analysis
The Tribunal examined the legal framework under the SEZ Act, 2005, and the Customs Act, 1962. It noted that the department did not dispute that NTAL was a registered SEZ unit, nor did it allege that the goods were not supplied for authorized operations. The Tribunal relied on the Division Bench decision in Cummins Turbo Technology, which held:
"The charging sections, having been overridden by the SEZ Act, no legal authority to levy and collect central excise duty, customs duty or service tax for goods or services supplied for authorised operations of SEZ developers and units covered by section 26 remains. Without such a legal authority, no tax or duty can be either levied or collected in view of article 265 of the Constitution of India."
The Tribunal held that once the goods are supplied to an SEZ unit for authorized operations, the Customs Act’s charging provisions cease to apply. The burden to prove that the supply was not for authorized operations lay with the department, which it failed to discharge.
Regarding Section 114AA, the Tribunal observed that the show cause notice dated 24.08.2012 proposed penalties only under Section 114, and not under Section 114AA. The imposition of penalty under Section 114AA without prior notice violated the principles of natural justice. The Tribunal emphasized that penalties under Section 114AA are distinct and require specific allegations and opportunity to respond.
The Tribunal further noted that the department’s reliance on third-party records from NTAL, without independent corroboration or investigation into the appellant’s procurement chain, was legally unsustainable. The absence of any document signed by the appellant, invoice, transport record, or bank transaction linking him to the supply rendered the entire case speculative.
The Verdict
The appeal was allowed. The Tribunal set aside the order dated 31.07.2019 in its entirety as it pertained to the appellant. The demand for customs duty of Rs. 72,11,515/-, interest thereon, penalty of Rs. 72,11,515/- under Section 114, and penalty of Rs. 72,11,515/- under Section 114AA were all quashed. The Tribunal held that no duty was leviable, no penalty could be sustained, and the order was procedurally invalid.
What This Means For Similar Cases
Supply to SEZ Units Is Duty-Free by Statute
- Practitioners must assert that any supply to an SEZ unit for authorized operations is exempt from customs duty under Section 26 of the SEZ Act, 2005.
- The burden shifts to the department to prove that the goods were not used for authorized operations - a high threshold rarely met.
- Duty demands against traders supplying to SEZ units should be challenged on jurisdictional grounds, not merely evidentiary ones.
Penalty Under Section 114AA Requires Specific Notice
- Penalties under Section 114AA cannot be imposed unless specifically proposed in the show cause notice.
- This is a non-negotiable procedural safeguard under natural justice.
- Any attempt to impose Section 114AA penalty without prior notice is void ab initio and must be set aside.
Third-Party Records Alone Are Insufficient
- Ledgers or computer data from a third party (e.g., buyer’s records) cannot substitute for direct evidence linking the accused to the transaction.
- Investigations must trace the supply chain from origin to destination, including procurement records of the alleged supplier.
- Absence of such evidence renders the entire case speculative and legally unsustainable.
