The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Ahmedabad Bench, has held that customs duty liability on goods imported into a Special Economic Zone (SEZ) arises only when the goods are cleared from the SEZ to the Domestic Tariff Area (DTA), and not while the goods remain in the SEZ for authorised operations.
The bench of Dr. Ajaya Krishna Vishvesha (Judicial Member) set aside the condition requiring the importer to furnish a bank guarantee of ₹29,24,465, representing 50% of the alleged differential customs duty. However, it retained the requirement of furnishing a bond equivalent to the value of the goods, amounting to ₹2,82,20,472.
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The appellant/importer had imported consignments described as “left over tarpaulin fabric for pavilion and tent purposes in mixed colours” through 21 SEZ Bills of Entry during February 2025 to April 2025.
The goods were intended to be warehoused at Cargo Care Agency, an FTWZ unit located in Kandla SEZ. The unit had obtained permission to undertake additional authorised manufacturing activities, including cutting, trimming and stitching for domestic and foreign clients.
The consignments were subsequently placed on hold by the Directorate of Revenue Intelligence (DRI), Ahmedabad, for detailed examination. Samples of the imported fabric were sent for testing and analysis.
According to the department, the test reports indicated that the goods were not “tarpaulins” as declared but fabrics having different specifications. The DRI alleged that various varieties of fabric had been imported under the guise of tarpaulin and the consignments were consequently seized on allegations of misdeclaration.
The Commissioner of Customs permitted provisional release of the 21 seized consignments under Section 110A of the Customs Act, 1962.
The release was made subject to two financial conditions: Bond: ₹2,82,20,472, equivalent to the approximate value of the seized goods and Bank Guarantee: ₹29,24,465, representing 50% of the differential duty.
The importer challenged the imposition of these conditions before the CESTAT.
The appellant argued that the imported goods were either already warehoused in the SEZ or were intended to be warehoused there for authorised operations. Since the goods had not been cleared into the DTA, the appellant contended that customs duty had not yet become payable.
According to the appellant, Section 26 of the SEZ Act, 2005 provides exemption from customs duty on goods imported into an SEZ for carrying out authorised operations. The appellant therefore argued that demanding a bank guarantee based on customs duty allegedly payable at that stage was legally unsustainable.
The department, on the other hand, opposed the appeal and alleged that the Importer-Exporter Code (IEC) of H R Enterprises was being misused for importing various goods by another individual, identified as Haresh Shethiya, who according to the department was the actual importer.
The Tribunal noted that the imported goods were to be warehoused in an FTWZ unit having permission to undertake authorised manufacturing activities.
The permitted activities included trimming, stitching and cutting. The Tribunal further observed that the goods after undergoing such manufacturing activities would be different from the goods originally imported and would thereafter be cleared from the SEZ to the DTA.
The Tribunal examined the statutory scheme under Sections 26 and 30 of the SEZ Act.
Section 26(1)(a) provides exemption from customs duty on goods imported into an SEZ for carrying out authorised operations by the developer or entrepreneur. Section 30, on the other hand, provides that goods removed from an SEZ to the DTA are chargeable to customs duties, including applicable anti-dumping, countervailing and safeguard duties, as leviable on such goods when imported.
The Tribunal held that the statutory scheme makes it clear that customs duty liability arises when goods are cleared from the SEZ to the DTA and not before that stage.
In the present case, the imported goods had not reached that stage. Some goods were yet to be warehoused in the FTWZ, while some were already lying in the FTWZ. In either situation, the authorised operations had not yet been completed.
Only after the authorised operations are undertaken would the manufactured goods be cleared from the SEZ to the DTA and become subject to the applicable customs duty.
The Tribunal therefore found that computing customs duty on the imported goods at the provisional-release stage, before their clearance from the SEZ to the DTA, was not legally sustainable.
The Tribunal relied upon the legal position laid down in Adani Power Limited v. Union of India by the Gujarat High Court, which was subsequently upheld by the Supreme Court.
The Gujarat High Court had explained that the SEZ framework treats the SEZ area as outside the customs area for the relevant purpose and that Section 30 governs the duty treatment when goods are cleared from an SEZ to the DTA.
The Supreme Court, while upholding the relevant principle, explained that Section 30 operates as a parity provision. It aligns the customs-duty treatment of SEZ-to-DTA clearances with the duty that would apply to comparable imports and does not create a new customs levy beyond the statutory charging framework.
The Supreme Court further observed that the deeming fiction under Section 30 cannot be extended beyond the purpose for which Parliament enacted it.
The CESTAT concluded that the department could not demand a bank guarantee calculated on the basis of customs duty allegedly payable on the imported goods before their clearance from the SEZ.
The Tribunal specifically held that the ₹29,24,465 bank guarantee, representing 50% of the differential duty, was not legally sustainable and was liable to be set aside.
The Tribunal did not completely dispense with the conditions for provisional release. It retained the requirement of a bond for ₹2,82,20,472, equivalent to the value of the goods.
The Tribunal modified the provisional release order and permitted release of the goods subject to furnishing the value-equivalent bond.
However, the goods were required to be used only for authorised operations in the FTWZ.
The Tribunal clarified that the appellant would remain liable to pay the appropriate customs duty on the manufactured goods when those goods are subsequently cleared from the SEZ to the DTA after completion of the authorised operations.
The Tribunal observed that allowing provisional release on these modified conditions would serve the interests of both the appellant and the Revenue.
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