No Exemption from Compensation Cess to SEZ:  Andhra Pradesh HC [Read Order]

The Andhra Pradesh High Court(HC) has held that exemption from compensation cess is not allowable for Special Economic Zones (SEZ) as per the Special Economic Zones Act, 2005 (‘the SEZ Act’).

The petitioner is a company engaged in the business of Ferro Alloys manufacturing. It was established as a SEZ unit per the terms of the Special Economic Zones Act, 2005 (‘the SEZ Act’) upon obtaining the letter of approval. As per Section 26 of the SEZ Act, the petitioner’s unit is exempt from paying any duty, tax or cess under the Customs Act, 1962 or Customs Tariffs Act, 1975.

The petitioner sent two letters seeking clarification from the Director (SEZ) for exemption of cess payable under the Goods and Services Tax (Compensation to States) Act, 2017 (“the GST Compensation Act”) on the import of coal under the Customs Act, 1962 or Customs Tariff Act, 1975.

The 2nd respondent issued a letter stating that Section 26(1)(a) of the SEZ Act, 2005 exempts SEZ units from any duty of Customs under the Customs Act, 1962 or Customs Tariff Act, 1975. Further, under notification No.64/2017 dated 05.07.2017, the IGST leviable under section 3(7) of the Customs Tariff Act, 1975 is exempted on all the goods imported into India by a SEZ unit. However, no such exemption for compensation cess leviable under section 3(9) of the Customs Tariff Act, 1975 is provided either under the Customs Act or IGST Act.

The cess on coal under the GST Compensation Act cannot be exempted unless (i) CBEC/GST issues a notification exempting the said cess or (ii) the first schedule under section 7 of SEZ Act is amended by the power under section 54 of the said Act. The said view of the 2nd respondent is misconceived and erroneous for the reason that under section 26 of the SEZ Act itself, the levy of duty, tax or cess under the Customs Act, 1962 or Customs Tariff Act, 1975 is exempted. The 2nd respondent on an erroneous view started demanding the petitioner to submit a bond along with a bank guarantee equal to the amount of compensation cess and on fulfilling the same only allowing the goods to be brought into the SEZ area.

As per section 11(2) of the GST Compensation Act, 2017, the provisions of the CGST Act and the rules thereunder including those relating to assessment, ITC, non-levy, short levy, interest, appeals, offences and penalties shall as far as may be, mutatis mutandis apply in relation to the levy and collection of cess leviable under section 8 on the intra-state supply of goods and services and interstate supply of goods and services. Further, as per Circular No.1 /1/2017 dated 26.07.2017 issued by respondent No.1, clarification regarding the application of section 16 of the IGST Act in relation to zero-rated supply for compensation cess was issued.

A special economic zone (SEZ) is an area in a country that is designed to generate positive economic growth. An SEZ is normally subject to different and more favourable economic regulations compared to other regions in the same country, including tax incentives and the opportunity to pay lower tariffs. SEZ economic regulations tend to be conducive to and attract foreign direct investment (FDI). The petitioners being the units in the SEZ, are claiming exemption on payment of GST Compensation Cess relying on the provisions of SEZ Act, 2005.

A division bench comprising Justice U Durga Prasad Rao and Justice Venkata Jyothirmai Pratapa observed that conjunctive study of Section 26(1)(a), 2(zd) of SEZ Act, 2005 and Section 2(15) of Customs Act, 1962 would pellucidly tell us that the phrase ‘duty of customs’ used in Section 26(1)(a) of SEZ Act only refers to duty leviable under Customs Act, 1962 but the said phrase does not include cess under GST Compensation Act.

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