By TIOL News Service

AHMEDABAD, NOV 13, 2013: THE Commissioner of Customs, Kandla has vide his order dated 19/04/2013 confirmed the demand of customs duty of Rs.860 crores along with interest and an equivalent penalty. Personal penalties have also been imposed on co-noticees. The ground for confirmation - that the goods imported are "Alloy Steel" falling under Tariff Heading 72.25 by virtue of Chapter Note 1(f) of Chapter 72 of Customs Tariff whereas the Advance Licences, against which goods were imported, were issued for duty free import of Non-Alloy Steel.

Before the CESTAT with a Stay application, the appellant made two broad propositions to show that they had prima facie case. The first was - that steel imported by the Company is non-alloy but the Commissioner has misconstrued Chapter Note 1(f). The second is that regardless of the classification, the steel imported has been actually used in the export product and 100% export obligation has been completed and hence the language of the advance licence must be construed having regard to provisions of the Customs Notification and Foreign Trade Policy.

To buttress the aforesaid two propositions voluminous arguments were advanced and case laws were also relied upon. Significant amongst those were that the expression Non-Alloy Steel must be given a contextual meaning in the background of the Advance Licence Scheme as held by the Apex Court in   RBI vs Peerless General Finance - (2002-TIOL-670-SC-MISC);   that due regard must be had to the object and purpose of the Scheme as held by the Supreme Court in Oblum Electrical Industries Ltd vs CC - (2002-TIOL-218-SC-CUS). By referring to the Consolidated Accounts for the year ended 31/03/2013, it was submitted that there is a Post Tax loss of about Rs.88 crore and hence any order of pre-deposit would cause the Company undue hardship.

The Special Consultant appointed by the Revenue inter alia submitted that on a plain reading of Note 1(f), when the steel has an element which by weight conforms to the proportions shown thereunder, the steel ceases to be non-alloy steel and merits classification under heading 72.25. He vehemently submitted that the Company knew the truth as has been admitted in the statements of the Chairman and other senior officers of the Company recorded under Section 108 of the Customs Act that the steel imported by them was alloy steel and yet they cleared them duty free as non-alloy because the advance licences were for non-alloy steel falling under heading 72.08. He also invited the attention of the Bench to the various representations made by the Company during investigations in which the Company accepted that it made a mistake by applying for licences for non-alloy steel and erroneously imported the goods. It was further submitted that the advance licences not only describe the goods as "non-Alloy Steel" but also indicate the ITC(HS) Code as 72.08 which corresponds to Customs Tariff 72.08 meaning thereby that unless the goods imported are classified under the same heading, duty free benefit is not available.

The Bench observed -

+ The advance licence scheme is to encourage exports and allow import of duty free inputs required for manufacture of export goods. There is no dispute that the entire quantity imported has been used in accordance with FTP and Customs Notification for export production. There is also no dispute that whatever be the goods- alloy or non-alloy steel after using the, final products have been exported and export obligation is 100% completed.

+ We find there is no allegation of diversion of goods imported duty free in the market or mis-utilisation for some other purpose. There appears also no dispute that API standard X-70 grade can be either alloy or non-alloy in terms of Note 1(f) as applied by the Commissioner.

+ Any type of steel is an alloy and there is no definition of Non Alloy Steel in the Customs Tariff. If steel by itself as seen from Note 1(d) and (e) to Chapter 72 is an alloy, normally, it would be incorrigible to conceive of non-alloy steel. But Note 1(f) defines "Other Alloy Steel". Neither the assessee nor the Department has thrown light on the word "Other". Note 1(f) starts with the words "Steel not complying with the definition of stainless steel.......". Note 1(f) follows definition of Steel and Stainless Steel in Note 1(d) and (e). As such, on plain reading it appears that Note 1(f) covers all types of steel except stainless steel and not just confined to alloy steel as contended by MrMondal because if it is accepted that all steel is a ferrous based alloy, there is no need of definition of alloy steel. The use of the word "Other" and the absence of definition of non-alloy steel, at this stage, subject to detailed further hearing, prima facie indicates that Note 1(f) covers all forms of steel.

+ What distinguishes alloy from non-alloy steel, and for this, the test, prima facie, appears to be presence all the elements in a given batch of steel in the same proportion by weight as shown in Note 1(f) when there are more than one elements to make it alloy steel but if all the elements are in different proportions, it would be non-alloy steel. If this interpretation is accepted then even as per MTC, the steel imported by the Applicants cannot fall under Note 1(f). We are conscious of the division of Chapter 72 into Parts I to IV where Part II is for Non-Alloy and Part IV is for Other Alloy Steel but Note 1(f) is not restricted to Part IV only and as per the opening part of Note 1 to Chapter 72 applicable to the whole Schedule. Prima facie it does appear that even if interpretation by both sides is considered, when two views are possible, on first principles, and without any reference to the case of Tata Motors, the one in favour of assessee must be preferred in matters of classification whereas it is the settled law the burden to prove is on the Department.

+ In matters of classification what needs to be followed are the provisions of the Tariff and the relevant Chapter Notes and not the individual's understanding of the same. There is also no estoppel in matters of classification, and therefore while these statements and representations shall be considered in detail at the final hearing, for the hearing of the stay petitions, suffice is to say that without an unequivocal determination on the correct scope and ambit of Note 1(f) these cannot be considered in isolation. We also take note of the fact that Customs Notification refers to materials required for manufacture goods for export which expression must be given a wide meaning as per the law down in Oblum Electrical (supra) and therefore regardless of the classification under 72.08 or 72.25, so long as the steel imported was required to manufacture goods for export and has infact been so used as stated, benefit of Customs Exemption Notification cannot be denied.

+ We find prima facie no illegal illegible benefit or gain to the Applicant, if all goods are exported and hence prima facie no case of intention to evade duty, given the absence of diversion or mis-utilisation is made out.

+ On the balance of convenience we find that since all duty free inputs as imported in this case are required for manufacture of goods for export and have infact as claimed and not disputed, actually so used, there is no question of passing of the incidence of duty. It is also undisputed that clarifications given by Norms Committee of Ministry of Commerce, specifically states that import alloy/non-alloy steel, is permitted as long as it can be shown that imported goods are consumed in manufacture of export goods.

Holding that the appellant has made out a prima facie case, the Bench granted waiver of pre-deposit of the adjudged amounts and stayed the recovery.

We will keep you posted - after all, 860 Crores is at stake!

(See 2013-TIOL-1696-CESTAT-AHM)