Fire gutted an SEZ factory. Customs said pay duty. CESTAT said no.

When a fire gutted an SEZ factory, the Customs Department said: pay duty anyway. CESTAT said: no.

ONGC Petro Additions Limited runs a unit in the Dahej Special Economic Zone, Gujarat. In 2021, a fire broke out. It destroyed imported raw materials worth crores. The company did what any prudent business would do: it applied for remission of customs duty under Section 23 of the Customs Act, 1962. The Commissioner of Customs, Ahmedabad, said no. Three reasons were given. None of them survived the scrutiny of the Customs, Excise & Service Tax Appellate Tribunal, West Zonal Bench, Ahmedabad.

The stakes were simple: either ONGC Petro would get a waiver of duty on goods that had literally turned to ash, or it would pay customs duty on nothing. For any company operating in an SEZ, where duty-free imports are the norm, this question matters profoundly. If remission is denied after a fire, the duty becomes a dead loss — not just the value of the goods, but the tax on top. A double blow.

The fire, the survey, and the rejection

The fire at the Dahej SEZ unit was not a small incident. A surveyor was appointed. The survey report concluded that the fire was sudden and beyond the control of the company. That should have been the end of the matter. But the Commissioner of Customs, Ahmedabad, issued an Order-in-Original on 3 September 2021 rejecting the remission application. Three grounds.

The Commissioner gave three grounds. First, Section 23 of the Customs Act does not apply to SEZ units because the SEZ Act, 2005 has an overriding effect over other laws. Second, the company had not taken proper precautions to prevent the fire — in other words, negligence. Third, the company had insured only the principal value of the goods and had not covered the customs duty component. The Commissioner held that this failure to insure the duty meant the company could not claim remission. I find that reasoning particularly odd — but we'll get to it.

ONGC Petro appealed to CESTAT, Ahmedabad. The appeal was heard by a two-member Bench comprising Mr. Ramesh Nair (Author) and Mr. Raju (Concurring). The judgment was delivered on 11 December 2023 in Customs Appeal No. 10007 of 2022 - DB.

What the company argued

The learned Counsel for ONGC Petro argued that Section 23 of the Customs Act is a standalone provision that applies to all imported goods, including those in SEZ units. The SEZ Act, 2005 does not contain any provision that is inconsistent with Section 23. The overriding effect of the SEZ Act only displaces provisions of other Acts that are directly contradictory. Since remission of duty on destroyed goods is not dealt with in the SEZ Act, the Customs Act continues to apply. Simple logic.

On the negligence point, the company pointed to the survey report. The fire was sudden. There was no evidence of any failure on the part of the company. The Customs Department had not conducted any independent inspection or analysis. The allegation of negligence was baseless — pure conjecture dressed up as a reason.

On the insurance point, the company argued that goods imported into an SEZ unit are duty-free at the point of import. The insured value naturally reflects only the principal invoice value. There is no duty component to insure because no duty is paid at the time of import. To deny remission because the company did not insure a duty that was never paid would be circular logic. Worse, it would be irrational.

The company relied on four precedents: M/s Satguru Polyfab Pvt. Ltd v. CC, Kandla (2011 (267) ELT 273 (Tri.-Ahmd)), M/s Jindal International v. CC, Kandla (2013 (290) ELT 729 (Tri.-Ahmedabad)), Sami Labs Ltd v. The Commissioner of Customs (February 28th, 2007), and State of Haryana v. Dalmia Dadri Cement Ltd. (2004 (178) ELT 13 (SC)).

The first ground: does Section 23 apply to SEZ units?

The Bench examined the overriding effect of the SEZ Act, 2005. The SEZ Act does indeed contain a provision that it overrides other laws. But the key word is "inconsistency." The overriding effect only displaces provisions of other Acts that are inconsistent with the SEZ Act. The question, therefore, is whether Section 23 of the Customs Act is inconsistent with any provision of the SEZ Act.

The Bench found no such inconsistency. The SEZ Act deals with the establishment, development, and management of SEZs. It provides for duty-free import of goods for authorised operations. But it does not contain any provision dealing with remission of duty on goods that are destroyed after import. The Customs Act, which is the parent statute governing all imports, fills that gap. Section 23 is a beneficial provision that allows remission when goods are lost, destroyed, or abandoned. There is nothing in the SEZ Act that prohibits this. Nothing at all.

The Bench followed M/s Satguru Polyfab Pvt. Ltd v. CC, Kandla and M/s Jindal International v. CC, Kandla, both of which had held that Section 23 remission is available to SEZ units. The first ground of the Commissioner was unsustainable.

The second ground: was the company negligent?

The Commissioner had held that ONGC Petro did not take proper precautions to prevent the fire. But the survey report told a different story. The fire was sudden. It was beyond the control of the company. The Customs Department had not conducted any independent investigation. No evidence of negligence was produced. Zero.

The Bench observed: "It is the appellant who has to be most careful about their goods as it is not only the duty but the huge stake of value of the goods is involved. Therefore, it cannot be imagined that the appellant was careless and negligent due to which fire incidence has taken place."

This is a powerful observation. The Bench recognised that a company operating a large factory has a far greater economic interest in its goods than the customs duty amount. The value of the raw materials themselves runs into crores. No rational business would be careless with such assets. To allege negligence without any evidence, especially when a survey report establishes the opposite, is arbitrary. Frankly, it's bad law.

The second ground was rejected.

The third ground: non-insurance of duty

The Commissioner had held that because ONGC Petro insured only the principal value of the goods and not the customs duty component, remission should be denied. The Bench found this reasoning flawed.

Goods imported into an SEZ unit are duty-free at the point of import. No customs duty is paid. The insured value, therefore, reflects only the invoice value of the goods. There is no duty component to insure because no duty has been paid. To say that the company should have insured a duty that was never paid is to demand the impossible. It's like asking someone to insure a car they don't own.

More fundamentally, the Bench held that non-insurance of the duty element is not a ground for denying remission under Section 23. The provision does not require the importer to insure the goods or the duty. It only requires that the goods have been lost, destroyed, or abandoned. If that condition is satisfied, remission follows. Period.

The third ground was also rejected.

THE PLAY: If your SEZ unit suffers destruction of imported goods, apply for remission under Section 23 of the Customs Act. The SEZ Act does not override this provision. The Customs Department cannot deny remission merely because you did not insure the duty component — especially when no duty was paid at import.

The ratio that matters

The judgment establishes three clear principles. First, Section 23 of the Customs Act applies to SEZ units. The overriding effect of the SEZ Act only displaces inconsistent provisions, and there is no inconsistency between Section 23 and any provision of the SEZ Act. Second, negligence cannot be presumed. If a survey report establishes that the fire was sudden and beyond control, and the Department produces no evidence to the contrary, the allegation of negligence is baseless. Third, non-insurance of the duty element is not a valid ground for denying remission. Goods imported into an SEZ are duty-free; there is no duty to insure.

The Bench also made an obiter observation that carries practical weight: the unit holder has the most to lose from destruction of its goods — far more than the duty amount. It is therefore unreasonable to assume negligence without concrete evidence.

Why this matters for SEZ units and their advisors

For any company operating in an SEZ, this judgment is a shield. The Customs Department has often taken the position that the SEZ Act overrides the Customs Act entirely, leaving SEZ units without the benefit of remission provisions. This judgment puts that argument to rest. Section 23 remains available. Good news for SEZ operators.

For CFOs and founders, the takeaway is operational. When a fire or other calamity destroys imported goods, do not assume that remission is impossible. File the application under Section 23. Ensure that a surveyor's report is obtained promptly. Document the incident. The burden of proving negligence lies on the Department, not on you.

For advocates, the judgment provides a clean precedent. The three grounds rejected by CESTAT are likely to be raised by the Department in similar cases. This judgment gives you the ammunition to counter each one.

The bottom line: if your goods are destroyed, you do not have to pay duty on ashes. Section 23 is alive and well, even in SEZ units.