Facts of the Case

The petitioners — Maithan Alloys Limited, a company engaged in ferro alloys manufacturing operating a SEZ unit at Atchutapuram, Visakhapatnam (W.P.Nos.1009 of 2019 and 6216 of 2021), and Parry Sugars Refinery (India) Pvt. Ltd., a SEZ unit at Vakalapudi, Kakinada (W.P.No.2631 of 2021) — sought exemption from GST Compensation Cess payable under the Goods and Services Tax (Compensation to States) Act, 2017 on import of coal, relying on Section 26(1)(a) of the SEZ Act, 2005. Maithan Alloys had sought clarification from the Development Commissioner, SEZ, by letters dated 05.07.2017 and 09.08.2017; the 2nd respondent's letter dated 04.09.2017 denied the exemption, holding that Notification No.64/2017-Customs dated 05.07.2017 exempted only IGST under Section 3(7) of the Customs Tariff Act, 1975, and not compensation cess under Section 3(9). An interim stay against the demand for a bank guarantee was granted on 12.06.2019 and extended on 10.07.2019; a subsequent demand dated 04.11.2020 to renew the guarantees was separately challenged in W.P.No.6216 of 2021. Parry Sugars similarly sought waiver through letters between 2019 and 2020 and challenged the rejection letter dated 04.01.2021 in W.P.No.2631 of 2021.

Issues Involved

  1. Whether SEZ units are exempt from payment of GST Compensation Cess, leviable under Section 8 of the GST Compensation Act, 2017 read with Section 3(9) of the Customs Tariff Act, 1975, on import of coal, under Section 26(1)(a) of the SEZ Act, 2005.
  2. Whether the exemption from "duty of customs" under Section 26(1)(a) of the SEZ Act extends to "cess" levied under the GST Compensation Act.
  3. Whether the writ petitions were maintainable given the availability of an appellate remedy under Section 128 of the Customs Act, 1962.

Petitioner's Arguments

  • Section 26(1)(a) of the SEZ Act, 2005 exempts SEZ units from "any duty of customs" under the Customs Act, 1962 or the Customs Tariff Act, 1975, and since the Compensation Cess is levied and collected under Section 3(9) of the Customs Tariff Act on imported goods, it falls within the scope of this exemption.
  • Reliance was placed on Flextronics Technologies (India) Pvt Ltd vs State of Tamil Nadu, 2016 (341) ELT 522 (Mad.), to argue that duties referable to the Customs Tariff Act, including cess-like levies, are covered by the SEZ exemption.
  • Under Section 16 of the IGST Act, 2017, supplies to SEZ units are zero-rated, and the compensation cess, being collected in the same manner as IGST, should equally stand exempted; Circular No.1/1/2017-Compensation Cess dated 26.07.2017 was also invoked.
  • The 2nd respondent's demand for a bond and bank guarantee equal to the compensation cess amount, as a precondition for allowing import of coal into the SEZ, was without authority of law and ought to be quashed.

Respondent's Arguments

  • Section 26(1)(a) of the SEZ Act exempts only "duty of customs," a term distinct from "cess"; the Goods and Services Tax (Compensation to States) Act, 2017 is a separate enactment levying cess, not customs duty.
  • Section 7 of the SEZ Act, which does use the words "tax, duty and cess," grants exemption only in respect of enactments specified in the First Schedule to the Act, and the GST Compensation Act is not included in that Schedule; without such inclusion (by amendment under Section 54), no exemption is available.
  • Notification No.64/2017-Customs dated 05.07.2017 exempted only IGST leviable under Section 3(7) of the Customs Tariff Act on goods imported by SEZ units, and deliberately did not extend the same exemption to compensation cess leviable under Section 3(9).
  • Section 16 of the IGST Act deals with zero-rated supply by a registered supplier within India, not with imports from a foreign supplier into a SEZ, and Circular No.1/1/2017 on compensation cess applies only to exports/DTA-to-SEZ supplies, not imports of coal from abroad.
  • The impugned communications were appealable under Section 128 of the Customs Act, 1962/Section 107 of the CGST Act, and the writ petitions were not maintainable on that ground as well.

Court Order/Findings

  • The Court traced the constitutional lineage of the GST Compensation Act, 2017 (enacted under Article 246A read with the Constitution (101st Amendment) Act, 2016) and noted that its constitutional validity, including the distinction between "cess" and "duty/tax," was upheld by the Supreme Court in Union of India vs Hind Energy and Coal Benefication (India) Ltd., AIR 2018 SC 5318.
  • Analysing Sections 7, 26 and 50 of the SEZ Act, 2005 as three distinct, self-contained exemption regimes (following GMR Aerospace Engineering Ltd vs Union of India, 2019(2) ALD 537), the Court held that Section 26(1)(a) uses only the word "duty," never "cess," while Section 7 — which the petitioners could not invoke since the GST Compensation Act is not listed in the SEZ Act's First Schedule — expressly and separately uses "tax, duty or cess."
  • The Court held that the phrase "duty of customs" in Section 26(1)(a) of the SEZ Act, 2005 refers only to duty leviable under the Customs Act, 1962, and does not extend to the GST Compensation Cess levied under the Goods and Services Tax (Compensation to States) Act, 2017, merely because its rate is referenced in Section 3(9) of the Customs Tariff Act, 1975.
  • Consequently, the SEZ units were held not entitled to exemption from GST Compensation Cess on import of coal, and Flextronics Technologies (India)'s case was distinguished as dealing with anti-dumping duty, not compensation cess.
  • All three writ petitions (W.P.Nos.1009 of 2019, 6216 of 2021 and 2631 of 2021) were dismissed, with no order as to costs; pending interlocutory applications were closed.

Important Clarification

  • The exemption for SEZ units under Section 26(1)(a) of the SEZ Act, 2005 is confined to "duty of customs" and does not automatically extend to every levy referenced within the Customs Tariff Act, 1975 — a "cess" (such as the GST Compensation Cess) is conceptually and textually distinct from a "duty."
  • To claim exemption from a cess or tax (as opposed to customs duty) under the SEZ Act, the relevant taxing enactment must be specifically included in the First Schedule to the SEZ Act under Section 7, or covered by a State notification under Section 50 — mere reference to the levy's computation mechanism in the Customs Tariff Act is not sufficient.
  • Zero-rating under Section 16 of the IGST Act, 2017 and Circular No.1/1/2017-Compensation Cess apply to supplies from a DTA/domestic supplier to an SEZ unit, and do not cover imports of goods (such as coal) by an SEZ unit from a supplier located outside India.
  • SEZ units importing goods that attract GST Compensation Cess (e.g., coal) must factor in the cess liability unless and until the GST Compensation Act, 2017 is specifically brought within the First Schedule of the SEZ Act, 2005.

Sections Involved

  • Section 26(1)(a) of the SEZ Act, 2005 – exemption from customs duty on goods imported into an SEZ unit; held not to cover the GST Compensation Cess.
  • Section 7 of the SEZ Act, 2005 – exemption from tax, duty or cess under enactments specified in the First Schedule, which does not include the GST Compensation Act.
  • Section 8 of the Goods and Services Tax (Compensation to States) Act, 2017 – levy and collection of compensation cess on intra-state, inter-state and imported goods/services.
  • Section 3(9) of the Customs Tariff Act, 1975 – mechanism for levy and collection of compensation cess on imported goods.
  • Section 16 of the IGST Act, 2017 – zero-rated supply, held inapplicable to imports by an SEZ unit from a foreign supplier.

Decision – In Favour of

All three writ petitions were dismissed with no order as to costs; the Court rejected the SEZ units' claim to exemption from GST Compensation Cess on imported coal. The Decision is squarely in favour of the Department (the Union of India and the customs/GST authorities).

Related Case Laws

No directly on-point case notes are currently published on this site.

Case Details

  • Court: High Court of Andhra Pradesh at Amaravati
  • Case No.: W.P.Nos.1009 of 2019, 6216 and 2631 of 2021
  • CNR: Not available on record
  • Coram: Hon'ble Sri Justice U. Durga Prasad Rao and Hon'ble Smt. Justice Venkata Jyothirmai Pratapa
  • Decision Date: 21.11.2023
  • Disposal Nature: Dismissed

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