By TIOL News Service

MUMBAI, MAR 10, 2014: THE appellants imported CRGO electrical steel sheets and electrolytic copper rods for the manufacture of transformers under Project Import Regulations, 1986 under heading No. 98.01 of the 1 st Schedule to the Customs Tariff Act. The appellant also procured the same materials without payment of Customs duty under Duty Exemption Entitlement Scheme and also on payment of appropriate Customs duty. The appellant had undertaken 16 projects under which they imported the aforesaid raw materials on concessional rate of duty under heading 98.01 of the Customs Tariff as per the Project Import Scheme during 1995-99. In respect of imports under 4 projects, the assessment had been finalised. However, in respect of 12 projects, the assessments were provisional and were pending finalization.

An investigation was undertaken into the project imports which revealed that the appellant had imported raw materials in excess of the quantity required by them for manufacture of transformers for the specified project. In certain cases it was observed that the import under the Project Import Scheme had taken place after the transformers had been manufactured and dispatched to the project site by the importer.

In his statement the Dy. General Manager (Materials) confirmed that in respect of the said project, transformer has been manufactured and dispatched from the factory even before the imported material had been cleared by the Customs and when he was questioned about what was done with the imported material, he evaded a direct answer and stated that the duty element saved has been passed on to the project authority. From the investigation, it came to light that the appellant imported CRGO steel and copper in excess of the requirement of the specific project and the imported material had not been used for the project for which it was intended but was diverted. Thus, it appeared that the appellant had violated the provisions of Project Import Regulations, 1986 by misusing the benefit under the said scheme.

Accordingly, a SCN was issued proposing to finally assess the goods imported under 12 contracts on merits without extending the concessional rate of duty applicable to project imports under CTH 98.01 and demanding differential duty of Rs.98,57,918/-. Confiscation and penal provisions were also invoked. In respect of the balance four contracts, where the assessments had already been finalised, another SCN was issued demanding differential duty of Rs.16,12,401/- and imposition of penalty, interest and fine. The Commissioner of Customs (Imports) confirmed the demand and imposed penalties and interest. As the goods were not physically available for confiscation, he imposed a fine in lieu of confiscation amounting to Rs.1.25 crore.

Before the CESTAT the appellant inter alia submitted -

++ in order to meet the delivery schedule, they did not wait for the imports under Project Import Regulations but utilised similar raw materials lying in stock with them, which was either duty-paid imported raw materials or raw materials imported under DEEC scheme in respect of which they had discharged the export obligation. However, they had passed on the benefit of concessional rate of duty under the Project Import Regulations to the customers even though they had utilised duty-paid materials to manufacture the transformers.

++ T here is no allegation that any material imported under Project Import Scheme had been diverted to the open market. The material they imported in respect of a particular project might have been used in the manufacture of transformers which were supplied for another project. Therefore, a purposeful interpretation must be given to the Project Import Regulations rather than a mechanical interpretation based on the one-to-one co-relation between the project and the goods imported under the Project Import. Once it is not disputed that the appellants were entitled to import under the Project Import Regulations and the project so registered were completed with similar materials, the benefit should be granted. Reliance is placed on the decisions in Tullow India Operations Ltd. - (2005-TIOL-134-SC-CUS) ONGC - (2007-TIOL-138-SC-CUS), BSES Kerala Power Ltd. - (2005-TIOL-971-CESTAT-BANG).

++ Extended period of limitation cannot be invoked in view of the decisions in Cosmic Dye Chemical - (2002-TIOL-236-SC-CX) and Pahwa Chemicals Pvt. Ltd. - (2005-TIOL-144-SC-CX).

++ Inasmuch as the goods are not available, the question of imposing any fine in lieu of confiscation is also not warranted - Associate Marketing Service - (2005-TIOL-1502-CESTAT-MAD).

++ Reliance is also placed on the decision of the apex Court in the case of Zuari Industries Ltd. - (2007-TIOL-55-SC-CUS) wherein it has been held that heading No. 98.01 needs to be liberally interpreted as it deals with industrialization.

The Revenue representative submitted that there is no provision under heading 98.01 or under the Project Import Regulations which permits the use of such goods intended for one project in another. The following case laws are relied upon to support the order passed by the adjudicating authority - Jacsons Thevara - (2002-TIOL-213-SC-CUS), NRB Bearing Ltd. - (2004-TIOL-365-CESTAT-MUM) and Eagle Flask Industries Ltd. - (2004-TIOL-74-SC-CX).

The Member (Technical) extracted the Note 2 to Chapter 98, Tariff Description of heading 98.01 and the regulations 4 & 5 of the Project Import Regulations, 1986 and observed -

+ it is clear that the benefit under the said entry would be available in respect of all items of machinery as well as components, raw materials for the manufacture of the aforesaid items, required for the initial setting up of a unit or for the substantial expansion of an existing unit of a specified project. The expression used is of a ‘specified project'. In other words, imported materials should be used either for the initial setting up of a unit or a substantial expansion of a unit of a ‘specified project.' In other words, imported materials should be used neither for the initial setting up of a unit or a substantial expansion of a unit of a ‘specified project'. This condition implies that materials imported for one unit of a specified project cannot be used elsewhere in any other unit or in any other project.

+ Similarly, the application for the project imports should clearly specify the particulars mentioned under clauses (a) to (d) of a sub-regulation (3) of the Regulation 5 and these particulars are required to be registered unit wise and project wise. The purpose of requiring all these details in advance is to ensure that there is one-to-one co-relation between the goods imported and the projects where they would be used and, therefore, it cannot be said that there is no requirement of one-to-one co-relation between the materials imported and the unit/projects where they are going to be used. Similarly, importation under contracts mentioned in Regulation 4 refers to contracts for a specific project. For a given project, there can be more than one contract under which the goods are required to be supplied after importation. After the project is completed the contracts have to be finalised under Regulation 7 so that the Revenue can be satisfy that the terms and conditions of the project imports have been complied with by the importer. If one-to-one co-relation is not maintained, fulfilling of the condition regarding usage of the imported product in a particular project cannot be established. That is the reason why the Project Import Regulations envisage registration of the contract for a specified project.

+ In the case before us it is an admitted position that the materials have been imported after the machinery have been already supplied to a project. If the machinery has already been supplied to a particular project, usage of the imported raw materials for the manufacture of machinery which is required to be supplied to a specific project cannot happen at all and, therefore, it is clear that the appellants have not complied with the terms and conditions of the Project Import Regulations.

The case laws cited by the appellant were held to be not applicable to the facts of the case and the decisions cited by the Revenue representative were held to support the charges leveled. In the matter of the point raised by the appellant that in view of the huge time lag involved in obtaining permission under the Project Imports, they were forced to utilize the materials imported earlier in lieu of the materials to be imported under the Project Import Regulations i.e. they were pleading hardship or inconvenience in following the terms and conditions of the Project Import Regulations, the Member (T) held that the same had no merits in view of the decision in Shankar Raju - (2011-TIOL-56-SC-MISC) and Mihir Textiles Ltd. - (2002-TIOL-833-SC-CUS). In the matter of the order passed of confiscation of goods and imposition of redemption fine, the Bench adverted to the decision in Weston Components - (2002-TIOL-176-SC-CUS) and held that there was no infirmity in the same. The Member (T) also held that t he fine of Rs.1 crore is not unreasonable as the duty sought to be evaded is also of the same order and that would have been the profit accruing to the appellant in case they had succeeded in their efforts. However, it was noted that the penalty of Rs.50 lakhs imposed on the appellant is quite high and considering the fact that the issue related to interpretation of the scope of a tariff entry, a nominal penalty should suffice. In fine, the penalty was reduced from Rs.50 lakhs to Rs.10 lakhs.

To sum up, the Member (T) dismissed the appeal; reduced the fine from Rs.1.25 crore to Rs.1 crore and the penalty from Rs.50 lakhs to Rs.10 lakhs.

The Member(J) with all humility chose to differ with the order recorded by the Member(Technical).

He explained the backdrop behind the introduction of the Project Import Regulations and after going through the tabulation details of time taken at various stages for import of raw material and for fabrication and supply of machinery noted that time was the essence of the contract; timely completion of the purchase order by the appellant was in national interest so as to facilitate timely completion of the project to avoid the evils of cost overrun and the technology becoming out of date or obsolete; that delay also results in loss of production which increases the cost of the project.

And further observed -

"8.9 The appellant as a person of ordinary prudence, instead of keeping the factory of production idle for 15 months, have utilized the similar raw material in hand and have completed the fabrication and supplied the transformer for the approved power project in time and as such have made substantial compliance of the statute. There is no other allegation or adverse finding in the impugned order of the Commissioner except that the transformers were fabricated and supplied in some cases before the actual arrival of the requisite raw material for that contract, under the scheme. There is no other mischief found or pointed out in the order on the part of the appellant like import of excess raw material or disposal of imported raw material clandestinely in the open market."

Noting that it is never the intent of the legislature to give some benefit by one hand, only to be taken back by another hand, the Member (J) distinguished the decisions cited by the Revenue and observed -

"8.14 In the case of beneficial legislation, once the ‘eligibility criteria' is met for the other allied conditions a "purposive interpretation" needs to be adopted. Where e.g. water is required to be drawn from a tank for irrigation, it is immaterial from which side of the tank water is drawn for irrigation."

In fine, he held that the appellant had complied with the conditions of the ‘Project Import Regulations' and the benefit of concessional duty cannot be denied and thus allowed the appeal.

The matter was, therefore, referred to the third Member.

The Member (Technical) heard the case extensively and concluded thus -

++ Classification of goods under the Project Import is with an idea of facilitating the assessment and faster clearance of the goods by Customs in respect of Projects.

++ The delays on the part of project authority, supplier, other Government authorities cannot be rectified by classification under Project Import. These have to be looked into by respective persons.

++ In the present case, Power Projects have been given a lower rate of duty by exemption Notification No. 90/94-Cus dated 1.3.1994. However, before availing the benefit of said notification goods are required to be classified under Heading 98.01.

++ If any goods are allowed to be imported subject to certain conditions, those conditions are required to be fulfilled in respect of the goods imported. Liability or benefit in respect of the imported/exported goods cannot be shifted to other set of goods imported or exported under and unless these are expressly allowed under the Customs law.

++ I have seen the said tabulation and I am of the view that period given in the tabulation can be easily curtailed if the importer takes appropriate steps as also does various activities parallel rather than serially.

++ There does not appear to be any reason for requiring such a long time because even before getting an order applicant would have estimated how much and what type of CRGO sheets are required. Nine months have been indicated for getting a recommendation letter from the Ministry of Industry. If the appellant has filed all the documents in time and followed up, there does not appear to be any reason for such a long time. In fact to my mind, making an application to Ministry of Industry, placing the order for Import etc. can all be done parallel. Even application for registering the contract under Project Import on provisional basis can be made even if for some reason there is a delay in getting a recommendatory letter from Ministry of Industry.

++ The goods can be imported and cleared by the appellant provisionally under project import at concessional rate or normal rate (and claim refund later on). The appellant has entered into the contractual delivery and highlighted that he is required to pay damage for delay in supplying the goods in time. The applicant should estimate and indicate a reasonable time to the buyer to execute the Project. The various reasoning given for delay in execution of Project are not on sound footing. In any case these are contractual obligation between appellant and buyer and statutory laws cannot be circumvented in the name of contractual obligations.

++ There can be no two opinions that the purposive interpretation has to be taken. Question is purposive interpretation of the law/scheme or action of the appellant. I think it is purposive interpretation of law.

++ The benefits or liabilities of the goods imported are with those goods alone, until and unless law provides for some other exigencies. In the present case, there is no dispute that the goods imported for particular Project were not used in that Project. These might have been used for goods cleared on payment of duty or in respect of some other project.

++ A plain reading of the said description (of heading 98.01) unambiguously states that " raw materials required for the manufacture of all items of machinery including prime movers, instruments…etc." are classifiable under the said heading. Obviously, after the import, raw material has to be used in the manufacture of machinery required for the initial setting up of a unit/substantial expansion.

++ While there is no stipulation that importer cannot use raw material imported under different Heading for the manufacture of machinery under Project import but there is definite stipulation that raw material imported under Project Import has to be used in the manufacture of machinery required for that Project.

Adverting to the Supreme Court decision in Shanker Raju Versus Union of India - (2011-TIOL-56-SC-MISC), the third Member (Technical) observed -

"12.11 The CRGO electrical sheets can be imported and cleared on payment of duty under chapter 72. Alternately, the same CRGO electrical sheets can be imported and classified under heading 9801 if conditions in the said heading are met. Such CRGO electrical sheets can be cleared at appropriate rate applicable to Project Import. Once, importer decides one of the two classifications for clearance purpose, he has to follow the rigours for that particular heading. In the present case, the importer had decided to clear the CRGO sheet under heading 9801, therefore, has to follow rigours of heading 9801 Description under Heading 9801 makes it clear that the raw material imported under Project Import is to be used in the manufacture of machinery which is required for that Project. Raw material imported cannot be used for the manufacture of machinery which is cleared for some other Project or other use. The law does not permit flexibility to inter-change material imported under the Project Import for some other purpose and therefore, CRGO electrical sheets imported for a particular Project, cannot be used for any other purpose including for some other project."

And added -

"When the law is clearly written and there are no two interpretation of that law, the concept of purposive interpretation of law cannot be other than what the law states. In my view, appellant is trying to justify his actions in the name of purposive interpretation. As explained earlier, Customs Duty is duty on the import of goods. Associated conditions, obligation and benefits are related to those goods alone here appellant has given false declarations to get the letter from Ministry of Industry violated the conditions on which contract was registered under Project Import Regulation and now on being caught is justifying the action as purposive interpretation of law."

The Member (T) distinguished the case laws relied by the appellant and after extracting the declaration made in their application submitted to the Ministry of Industry observed -

"From the declaration made by the appellant to the Ministry of Industry and also the communication from the Customs House, department was misled to believe that the material is being imported for the manufacture of capital goods. Further these capital goods shall be installed only for the Project for which such imported goods were cleared under Project Import Regulations, 1986. Further, from the declaration made by the appellant, it is clear that they knew that they shall be liable for any legal action in case of diversion of the goods imported under concessional duty or misuse of the imported material. In the present case it is an admitted position that imported electrical sheets were not used in the manufacture of transformers which were sent for the particular Project for which these were imported. The electrical steel sheets were diverted for the manufacture of other goods which were supplied to various customers, perhaps for some other Projects also. Under these circumstances, the action of the appellant is contrary to the declaration given to the authorities and it cannot be said that the appellant was not aware of the said provisions. Therefore, there can be no doubt that the imported goods are liable to confiscation, and the appellant is liable to pay redemption fine and penalty."

Holding that the extended period of limitation is invokable as the appellants had filed false declarations for claiming benefits, the third Member on reference agreed with the views of the referring Member(T) and concluded that t he appellant is not eligible for the benefit of Project Import concession under CTH 9801 and consequently the imported goods are liable to confiscation with option to redeem the same on payment of fine and the appellant is liable to penalty.

So, in view of the Majority decision, the appeal was dismissed.

Nonetheless, the fine was reduced by the Division Bench from Rs.1.25 crores to Rs.1 crore and penalty from Rs.50 lakhs to Rs. 10 lakhs.

(See 2014-TIOL-374-CESTAT-MUM)