The Delhi High Court has upheld the view that movement of equipment from Free Trade Warehousing Zone (FTWZ) / Special Economic Zone (SEZ) to Domestic Tariff Area (DTA) against a fresh Essentiality Certificate constitutes a fresh import and not a re-import, thereby disentitling the appellants from the residuary exemption under Serial No. 5 of Notification No. 45/2017-Cus. The Court held that the proposed movement of equipment from DTA to FTWZ and back to DTA against a fresh Essentiality Certificate for a new contract does not qualify for exemption from Basic Customs Duty, IGST and compensation cess under Serial No. 5 of Notification No. 45/2017-Cus.
The Court reasoned that the original transaction, founded upon the original EC and the corresponding contractual deployment, stood concluded upon completion thereof, and any subsequent EC gives rise to a distinct transaction notwithstanding the identity of the equipment. The appellants cannot attribute two inconsistent legal characters to the same movement, namely import under NN-50 and re-import under NN-45, merely to secure separate fiscal exemptions.
The FTWZ mechanism cannot be placed in a position of fiscal advantage over the express transfer mechanism under Condition No. 48(c) of NN-50, and the interposition of FTWZ cannot, merely by creating an additional procedural step, generate a further exemption under NN-45. The statutory fiction under SEZ legislation cannot be extended to create a benefit which the exemption notifications have not expressly conferred, added the Court.
The Division Bench comprising Justice Anil Kshetarpal and Justice Shail Jain observed that the concession under NN-50 is not a benefit attached absolutely or indefinitely to equipment imported to DTA under the notification; rather, it is a conditional fiscal concession extended in respect of specified goods intended for specified petroleum operations and upon fulfilment of the conditions prescribed thereunder. The Court pointed out that the equipment brought to India availing the concession under NN-50 does not confer upon the appellants an unrestricted right to retain the equipment in India and successively deploy the same for unrelated domestic contracts while preserving, through a series of subsequent transactions, all the fiscal consequences of the original concessional import.
The Court noted that the appellants, by their own assertion before CAAR, characterised the transaction as one requiring export of the equipment upon completion of the contract, and the subsequent shift in position before this Court, without any attempt to explain or reconcile the inconsistency, cannot be countenanced. The Court further observed that NN-45 presupposes that the goods have first been exported, and mere warehousing of goods in SEZ/FTWZ does not satisfy this requirement. Under Sections 2(m) and 2(o) of the Special Economic Zones Act, 2005, “export” and “import” have distinct statutory meanings and cannot be used interchangeably, and while movement of goods from DTA to SEZ/FTWZ constitutes “export”, movement from SEZ/FTWZ to DTA does not constitute “import” or “re-import” under the Act of 2005 or the Customs Act, 1962.
The Court observed that the second proviso to NN-45 excludes goods exported by a 100% export-oriented undertaking or a unit in a FTWZ from the exemption, and in terms of Rule 18(5) of the SEZ Rules, 2006, when goods are dispatched from FTWZ to DTA, they are regarded as having been exported by the FTWZ Unit, which would independently render NN-45 inapplicable. The Court also noted that CBIC Circular No. 21/2019-Customs dated 24.07.2019 was issued in the context of goods exported abroad for exhibition or on a consignment basis and the appellants’ proposed arrangement of warehousing the equipment in FTWZ pending a fresh contract was materially different.
The Court observed that Condition No. 48(c) of NN-50 expressly provides for transfer of goods from a specified person (transferor) to another specified person (transferee), and the legislature has consciously provided the manner in which the continuity of the concession may be preserved notwithstanding a change in the person or contractual deployment. The principle of expressum facit tacitum cessare was held to be squarely applicable, since the notification expressly provides the manner in which a particular contingency is to be dealt with, a further and materially different route cannot ordinarily be introduced by implication.
The Court further observed that a legal fiction must be confined to the purpose for which it is created and cannot be extended beyond its legitimate field, and consequently, the fiction under SEZ legislation cannot be employed to override independent conditions governing a concession under NN-50 or to manufacture an exemption under NN-45. The Court noted that the expression “re-import” must be understood in its ordinary legal and commercial sense, and while identity of goods is a factual element ordinarily present in a re-import, it is not by itself sufficient to constitute one; there must also be the requisite continuity between earlier export and the subsequent return.
The Court observed that the two notifications, NN-50 and NN-45, proceed upon fundamentally different juridical premises, and the appellants cannot treat the same inward movement as an import for the purpose of one notification and as a re-import for the purpose of another. The Court further noted that the original EC formed the basis of the initial import of equipment for specified petroleum operations of the original contractor, and upon completion of that certified deployment, the equipment would be disposed of in terms of stipulations contained in NN-50, making the original transaction a “closed transaction”.
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Briefly, the appeals arose from four distinct advance rulings rendered by the Customs Authority for Advance Rulings (CAAR) under Section 28-H of the Customs Act, 1962, each determining the eligibility of the appellants to claim exemption under Serial No. 5 of Notification No. 45/2017-Cus (NN-45) in respect of movement of equipment, to be deployed in petroleum operations, from a Special Economic Zone (SEZ)/Free Trade Warehousing Zone (FTWZ) to the Domestic Tariff Area (DTA).
The appellants are service providers engaged in rendering technical mining and allied support services, in the capacity of sub-contractors, to oil and gas exploration and production companies in India, including ONGC and Cairn India. In their capacity as sub-contractors, they import specialised equipment from outside India at a concessional rate of duty, with Basic Customs Duty (BCD) at NIL and IGST at 12%, under Notification No. 50/2017-Cus (NN-50), against the Essentiality Certificate (EC) issued by the respective contractors.
Upon completion of the contract for which an EC has been issued, instead of exporting the equipment out of India altogether, the appellants proposed to send the equipment, without any manufacturing or processing, to a Logistics Service Provider (LSP) situated within FTWZ, for safe keeping until a fresh contract is materialised, without claiming any duty drawback, rebate or other export incentive on this movement from DTA to FTWZ.
Subsequently, as and when a new contract is secured and a fresh EC is issued by the new contractor, the appellants proposed to clear the very same equipment, in the same form, from FTWZ back into DTA, while paying the concessional rate of duty under NN-50 and by claiming the benefit of residuary exemption under NN-45. The appellants themselves admitted in their application before CAAR that the EC was issued pursuant to a contractual condition requiring export of the equipment upon completion of the contract. CAAR ruled against the appellants, holding that they are not entitled to claim exemption from payment of BCD, IGST and compensation cess under NN-45 on clearance into DTA of equipment earlier sent by the appellant from DTA to a FTWZ.
