Export duty payable on steel products supplied to SEZ?

Export duty has been imposed on various steel items w.e.f. 10-5-2008, to control prices of Steel in India. The unexpected and unintended fallout is that both Ministry of Finance and Ministry of Commerce have taken a view that this export duty is payable on steel products supplied to SEZ and SEZ developer. Obviously this was not the intention, but even looking at statutory and legal provisions, it is doubtful if the levy of export duty on goods supplied to SEZ can stand scrutiny of law. The issues involved are discussed in this Article.

1. Background

Schedule II of Customs Tariff Act has been amended w.e.f. 10-5-2008 enabling Government to impose export duty on various steel products @ 20%. Subsequently, Notification No. 66/2008-Cus dated 10-5-2008 was issued reducing export duty @ 10% on certain steel products like flat rolled products, bars, angles, wires etc., and to 15% on pig iron, ferrous waste, iron and steel alloy ingots etc.

The intention was to control domestic prices by making exports of steel products costly. Intention was never to make domestic supplies costly. Initially, Shri Kamal Nath, Minister of Commerce and Industry stated that the export duty will not be applicable to supplies to SEZ. However, it seems finally, interpretation of Ministry of Finance has prevailed.

Ministry of Commerce and Industry, vide letter No. 30/063/2008 dated 30-6-2008 (F No. 6/2/2008-SEZ(pt) has instructed Development Commissioners of SEZ to allow specified steel products in SEZ only on payment of export duty. No reason has been given for this view.

Apart from the fact that this certainly was not the intention in imposing export duty on steel products, the issue is whether the view is legally sustainable.

1.1 Statutory provisions relating to export duty

Section 12 of Customs Act states that duty of customs shall be levied at such rates as may be specified on goods imported into, or exported from India.

As per section 2(18) of Customs Act, ‘export’ with its grammatical variations and cognate expressions, means taking out of India to a place outside India.

As per section 2(18), ‘export’ with its grammatical variations and cognate expressions, means taking out of India to a place outside India.

Section 2(27) of Customs Act states that 'India' includes  the territorial waters of India.

1.2 Definitions under SEZ Act

SEZ is outside the customs territory of India for purpose of undertaking authorised operations [section 53(1) of SEZ Act]. SEZ will be a port, airport, ICD, land station or land customs station u/s 7 of Customs Act from date to be notified  [section 53(2) of SEZ Act]. Accordingly, 15 SEZ have been notified as ‘port’ vide Notification No. SO 319(E) dated 14-3-2006.

101  SEZ have been declared as ICD (Inland Container Depot) vide notification No. SO 1806(E) dated 23-10-2007 [11 STT 14 (St), 218 ELT E18].

As per section 7(a) of Customs Act, Central Government can appoint ports or airports for unloading of imported goods and loading of export goods.

As per section 29(1) of Customs Act, vessel or aircraft entering India from a place out of India must land only at Customs port or a customs airport. The actual place where loading/unloading is permitted is approved by Commissioner of Customs.

As per section 2(m) of SEZ Act, “export” means—(i) taking goods, or providing services, out of India, from a Special Economic Zone, by land, sea or air or by any other mode, whether physical or otherwise; or (ii) supplying goods, or providing services, from the Domestic Tariff Area to a Unit or Developer; or (iii) supplying goods, or providing services, from one Unit to another Unit or Developer, in the same or different Special Economic Zone.

Thus, supply from DTA to SEZ unit or SEZ developer is ‘export’ as per SEZ Act.

As per section 51 of SEZ Act, provisions of SEZ Act will apply notwithstanding anything inconsistent contained in any other law or instrument having force of law. Thus, SEZ Act provisions have overriding effect. Moreover, SEZ Act is a special Act and other Acts like Customs Act, Central Excise Act etc. are general Acts. SEZ Act is also a later Act. Hence, in case of inconsistency, provisions of SEZ Act and Rules issued thereunder will prevail.

1.3 SEZ are not out of India

Section 53(1) of SEZ Act states that SEZ is outside the customs territory of India for purpose of undertaking authorised operations. Thus, SEZ are deemed to be outside India for limited purposes and not for all purposes. In fact, various Special Economic Zones have been declared as ‘port’ or ‘ICD’ under SEZ Act itself. It is nobody’s case that any port or ICD in India is outside India!

If indeed SEZ was taken as outside India for all purposes, Indian labour laws and Indian sales tax laws will also not apply.

Thus, supply to SEZ does not come within definition of ‘export’ as defined in Customs Act.

2. Which definition of ‘Export’ will apply?

The issue is which definition of ‘export’ will prevail? If definition of ‘export’ as given in Customs Act prevails, then export duty will not apply. If definition of ‘export’ as given in SEZ Act prevails, then export duty should apply.

2.1 Generalia specialibus non derogant

Generalia specialibus non derogant means special provision prevails over a general provision.

Special provisions prevail over general provisions. - State of Bombay v. United Motors (India) Ltd. - 1953 SCA 408 = AIR 1953 SC 252. * State of Gujarat v. Patel Ramjibhai Danabhai - (1979) 3 SCC 347 = AIR 1979 SC 1098 * Municipal Board, Bareilly v. Bharat Oil Company - (1990) 78 STC 453 (SC) * State of Rajasthan v. Gopi Kishan Sen AIR 1992 SC 1754 * South India Corpn v. Secretary, Board of Revenue AIR 1964 SC 207 = 15 STC 74 (SC) * Gobind Sugar Mills v. State of Bihar (1999) 115 STC 358 (SC) = 1999 AIR SCW 3041 = AIR 1999 SC 3097 = (1999) 7 SCC 76 * Patna Improvement Trust v. Shrimati Lakshmi Devi AIR 1963 SC 1077.

Special Act prevails over general Act – Talcher Municipality v. Talcher Regulated Market Committee 2004 AIR SCW 4407 = AIR 2004 SC 3954 = (2004) 6 SCC 178 * Bharat Petroleum v. P Kesavan (2004) 9 SCC 772 = 2004 AIR SCW 1989 (SC 3 member bench).

If we apply this principle blindly, it can be said that definition of ‘export’ in SEZ Act will prevail over definition of ‘export’ under Customs Act.

2.2 Same Act may be general for some purposes and special for other purposes

The principle Generalia specialibus non derogant has various aspects and has many exceptions.

The same Act may be general for some purposes while special for some other purposes. In LIC of India v. D J Bahadur AIR 1980 SC 2181 = (1981) 1 SCC 315, it was held that for certain cases, Act may be general while for certain purposes, it may be special. - quoted with approval in Allahabad Bank v. Canara Bank 2000 AIR SCW 1347 = AIR 2000 SC 1535 = 2000(4) SCC 406 – quoted with approval in Jay Engineering Works v. Industry Facilitation Council (2006) 71 SCL 189 (SC).

Special provision in general statute prevails - In ICICI Bank Ltd. v. SIDCO Leathers Ltd. (2006) 67 SCL 383 (SC), it was held that special provision in a general statute will prevail if the special statute has not made any special provision. A specific provision in general law dealing with a particular situation would override even a special law, which is inconsistent therewith – relying on Maru Ram v. UOI (1981) 1 SCC 107.

Customs law is special law in respect of export duty – Though SEZ Act is a special Act for purposes of provisions relating to SEZ, Customs Act is special Act for the purpose of imposition of customs duty on exports. Thus, definition of ‘export’ as given in Customs Act should prevail over definition in SEZ Act for purpose of levy of export duty.

3 Object of each provision has to be seen

In  State of Bihar v. Bihar Rajya MSESKK Mahasangh 2004 AIR SCW 7151 = (2005) 9 SCC 129  = AIR 2005 SC 1605, it was held that when two or more laws operate in same field and contain non obstante clause, no settled principle can be adopted except to refer to the object and purpose of each of the provisions containing non obstante clause - same view in Jay Engineering Works v. Industry Facilitation Council (2006) 71 SCL 189 (SC).

Purpose of SEZ Act - The preamble to the SEZ Act states that SEZ Act is to provide for development and management of the Special Economic Zones for the promotion of exports and for matters connected therewith or incidental thereto.

Obviously, purpose of SEZ Act is not imposition of customs duty.

3-1 Rule of Purposive Construction

The rule of purposive construction states that interpretation of statute should be done having regard to the purpose of the Statute. An eminent jurist of UK (Late) Lord Denning (1899 - 1999) has evolved this rule of construction.

Lord Denning had observed – ‘It is true that the words used, even in their literal sense, are the primary and ordinarily the most reliable source of interpreting the meaning of any writing : be it a statute, a contract or anything else. But it is one of the surest indexes of a mature and developed jurisprudence not to make a fortress out of the dictionary; but to remember that statutes always have some purpose or object to accomplish, whose sympathetic and imaginative discovery is the surest guide to their meaning'. - quoted with approval in K P Varghese v. ITO - (1981) 131 ITR 597 = AIR 1981 SC 1922. = 1982 (1) SCR 629 = (1981) 4 SCC 173 = 7 Taxman 13 (SC) * DLF Universal Ltd. v. Appropriate Authority  243 ITR 730 = 2000 AIR SCW 1838 = 110 Taxman 315 (SC) – same view in Amrendra Pratap Singh v. Tej Bahadur Prajapati 2004 AIR SCW 4103.

In Pepper v. Hart (1993) 1 All ER 42 (HL), it was observed, ‘The days have long passed when the courts adopted a strict constructionist view of interpretation which required them to adopt the literal meaning of the language. The courts now adopt a purposive approach which seeks to give effect to the true purpose of legislation and are prepared to look at much extraneous material that bears upon the background against which the legislation was enacted. – quoted with approval in – Thyssen Stahlunion GMBH v. Steel Authority of India 1999 AIR SCW 4016 = AIR 1999 SC 3923 = 1999(9) SCC 334.

In interpreting a provision in taxing statute, a construction which would preserve the purpose of the provision should be adopted. -  CC v. Parasrampuria Synthetics 2001 AIR SCW 3714 = 125 STC 255 = 253 ITR 274 = 133 ELT 9 (SC) * Periyar and Pareekanni Rubbers v. State of Kerala (2008) 13 VST 538 (SC).

In R S Nayak v. A R Antulay - AIR 1984 SC 684 = (1984) 2 SCC 500 = (1984) 2 SCR 914 (SC 5 member Constitution Bench), it was observed that function of Court is primarily to give effect to the real intention of Parliament in enacting the legislation.

3.2 SEZ exempt from customs duty

Section 26(1)(a) of SEZ Act states developer and entrepreneur in SEZ is exempt from any duty of customs on goods imported into SEZ or SEZ unit to carry out authorised operations.

Note that customs duty includes both import duty and export duty [section 12 of Customs Act].

Thus, any interpretation contrary to section 26(1)(a) of SEZ Act would be incorrect.

4. Conclusion

Applying the principle that same Act can be special for some purposes and general for some other purposes, it can be said with emphasis that in respect of imposition of export duty, provisions of Customs Act will prevail as the export duty has been imposed under that Act. SEZ Act is designed for entirely different purpose.

Applying the rule of purposive construction also, it can be said that purpose of definition of ‘export’ under SEZ Act is for different purpose and that definition cannot be applied for purposes of imposition of export duty, particularly when section 26(1)(a) of SEZ Act specifically exempts SEZ and SEZ units from duty of customs, which includes export duty.

4.1 Course of action

Since Development Commissioners have been instructed not to allow steel products unless customs duty has been paid, there is no alternative but to pay export duty and clear the goods for supply to SEZ.

If the supplier wants to fight it out, he should pay export duty under protest and then file refund claim.

4.2 Unjust enrichment doctrine does not apply

Doctrine of unjust enrichment does not apply to refund of export duty, as that refund is u/s 26 of Customs Act, which has not been amended – CC v. Ken Agritech 2004 (166) ELT 339 (CESTAT).

Section 27(2)(d) of Customs Act also makes it clear that doctrine of unjust enrichment does not apply to refund of export duty.

Thus, legally, doctrine of unjust enrichment will not apply. Practically, t is advisable to show the amount of refund claim as ‘claim receivable’ and not to charge the amount to profit and loss account.

The amount should not be recovered representing as ‘export duty’ from the buyer, though there is no legal bar in adjusting the prices suitably.

4.3 Writ remedy