SEZ Act Section 26(1)(e) | Sales to SEZ Units Exempt from Customs Duty; Demand Quashed for Violating Natural Justice : CESTAT

The Customs, Excise & Service Tax Appellate Tribunal has clarified that sales of goods to units within a Special Economic Zone are exempt from customs duty under the SEZ Act, 2005, rendering any demand, interest, or penalty arising therefrom legally unsustainable. The ruling reinforces constitutional limits on taxation and underscores procedural fairness in tax adjudication.

Background & Facts

The Dispute

The appellant, Shri Anil Awate, operated a proprietorship firm, M/s. Shri Sai Traders, registered with the Commercial Tax Department, Dewas (M.P.) since 20.12.1988 for trading in chemicals, laboratory equipment, and industrial goods. Between 19.10.2007 and 19.11.2007, the firm sold 157.035 Metric Tons of MS Scrap, valued at Rs. 29,73,985, to M/s. New Tech Abrasives Ltd. (NTAL), a unit located in the Special Economic Zone (SEZ) at Pithampur, Dhar (M.P.). The transaction was documented through 12 invoices. At the time of sale, no export duty was leviable on MS Scrap under Schedule-II of the Customs Tariff Act, 1975. The imposition of export duty on MS Scrap came into effect only on 10.05.2008, after the completion of these transactions.

Key Facts

• The appellant’s firm was duly registered under the Commercial Tax Department on 20.12.1988
• Sales to NTAL occurred between 19.10.2007 and 19.11.2007
• NTAL was an SEZ unit engaged in manufacturing M.S. Ingots and Shots/Grits
• No export duty was applicable on MS Scrap during the period of sale
• Export duty on MS Scrap was introduced by notification effective 10.05.2008
• The Directorate General of Central Excise Intelligence (DGCEI) conducted a search at NTAL’s premises on 23.11.2009
• During the search, documents and computer data were seized under panchnamas dated 23.11.2009
• The appellant’s statement was recorded under Section 108 of the Customs Act on 29.06.2011
• The show cause notice dated 24.08.2012 alleged a total supply of 443.595 MT of MS Scrap valued at Rs. 1,09,45,645, claiming duty evasion of Rs. 16,41,847 at 15% ad valorem
• The appellant was not provided copies of the documents relied upon by the department
• The appellant requested the documents multiple times but was denied access

Procedural History

• 19.10.2007 to 19.11.2007: Sale of MS Scrap by appellant to NTAL (SEZ unit)
• 23.11.2009: Search conducted by DGCEI at NTAL’s premises; documents and data seized
• 29.06.2011: Statement of appellant recorded under Section 108 of the Customs Act
• 24.08.2012: Show cause notice issued to appellant, without annexing relied documents
• 2012 - 2019: Appellant submitted replies and repeatedly requested access to documents; no response provided
• 31.07.2019: Commissioner of Customs, Indore, passed ex-parte order demanding duty, interest, and penalties under Sections 28(1), 114, and 114AA of the Customs Act
• 19.05.2026: Appeal heard and decided by CESTAT, Principal Bench, New Delhi

The Parties' Positions

For the Appellant

• The sale was to an SEZ unit, which is statutorily exempt from customs duty under the SEZ Act, 2005
• The transaction occurred before the imposition of export duty on MS Scrap
• The show cause notice did not specify any liability under Section 114AA, making its imposition illegal
• The department failed to serve copies of relied documents, violating the right to fair hearing
• The Commissioner passed an ex-parte order without granting a personal hearing, contrary to Section 112A of the Customs Act

For the Respondent

• The appellant was involved in clandestine supply of goods to an SEZ unit without payment of duty
• The demand was justified under the extended period of limitation under Section 28(1) proviso
• The penalty under Sections 114 and 114AA was warranted due to concealment
• The appellant had ample opportunity to respond and failed to do so adequately

Relief Sought

The appellant sought:

• Setting aside of the Commissioner’s order dated 31.07.2019
• Cancellation of the demand for customs duty of Rs. 16,41,847
• Cancellation of interest and penalties under Sections 114 and 114AA
• Declaration that the proceedings violated principles of natural justice

The Legal Issue

Can customs duty, interest, and penalties be lawfully imposed on a supplier who sold goods to an SEZ unit, where the SEZ Act, 2005, explicitly prohibits such levies, and where the show cause notice failed to specify the basis for penalty under Section 114AA and denied access to relied documents?

Arguments Presented

For the Appellant

The appellant’s counsel 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. The Tribunal had ruled that no customs duty can be levied on goods supplied to SEZ units for authorized operations, as such levies violate Article 265 of the Constitution. The counsel further argued that the show cause notice did not mention Section 114AA, making its imposition ultra vires. The failure to provide copies of relied documents and denial of personal hearing under Section 112A constituted a grave violation of natural justice.

For the Respondent

The Special Counsel for the Department contended that the appellant had concealed the true nature of the transaction and that the extended period of limitation justified the demand. He argued that the appellant had sufficient opportunity to respond and that the ex-parte order was justified due to non-cooperation. He did not dispute the absence of documents in the notice but claimed the department’s investigation was sufficient to establish liability.

The Court's Analysis

The Tribunal examined the interplay between the SEZ Act, 2005, and the Customs Act, 1962. It noted that Section 26 of the SEZ Act provides that no duty or tax shall be levied on goods or services supplied to an SEZ unit for authorized operations. The Division Bench in Cummins Turbo Technology had squarely held that this statutory bar overrides the charging provisions of the Customs Act. The Tribunal affirmed this view, stating:

"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 further held that since the sale was to an SEZ unit and no duty was leviable at the time of transaction, the demand under Section 28(1) was legally unsustainable. Consequently, interest under Section 28(1) and penalty under Section 114 could not be sustained. Regarding Section 114AA, the Tribunal emphasized that the show cause notice did not mention this provision at all, and therefore, the penalty imposed under it was without jurisdiction. The Tribunal also found that the failure to serve copies of relied documents and the ex-parte order passed without granting personal hearing under Section 112A violated the principles of natural justice. The appellant’s repeated requests for documents were ignored, rendering the proceedings fundamentally flawed.

The Verdict

The appeal was allowed. The Tribunal set aside the Commissioner’s order dated 31.07.2019 in its entirety as it pertains to the appellant. The demand for customs duty of Rs. 16,41,847, interest, and penalties under Sections 114 and 114AA were cancelled. The Tribunal held that the proceedings were vitiated by violation of natural justice and lack of statutory authority. No further action may be taken against the appellant in respect of the transactions dated 19.10.2007 to 19.11.2007.

What This Means For Similar Cases

SEZ Exemption Overrides Customs Duty Provisions

• Practitioners must now treat all supplies to SEZ units as exempt from customs duty, regardless of whether the goods are classified as dutiable under the Customs Tariff Act
• Any demand raised under Section 28(1) or other provisions against such supplies is legally untenable
• Tax authorities cannot rely on the extended period of limitation to circumvent the statutory bar under the SEZ Act

Penalty Imposition Requires Specific Notice

• Penalties under specific sections (e.g., Section 114AA) can only be imposed if the show cause notice explicitly invokes that provision
• Failure to mention the penalty provision in the notice renders the penalty order void ab initio
• Practitioners should challenge penalties on this ground even if the underlying duty demand is upheld

Natural Justice Is Non-Negotiable in Tax Proceedings

• Denial of access to relied documents violates the right to a fair hearing under Section 112A

• Ex-parte orders without personal hearing are invalid, even if the assessee is deemed non-cooperative

• Tribunals will not uphold proceedings where procedural fairness is compromised, regardless of the alleged seriousness of evasion

• Always verify whether the recipient of goods is an SEZ unit before assessing duty liability

• Ensure show cause notices clearly specify every provision under which penalty is proposed

• File applications for production of documents at the earliest stage; failure to do so may be fatal to the department’s case