By TIOL News Service

MUMBAI, JUNE 04, 2014: THE appellant is a 100% EoU manufacturing bulk drugs and pharmaceutical products. In a fire accident, the raw materials procured by the appellant, both imported as well as domestic, as well as finished products manufactured by using duty-free raw materials were damaged by fire.

As per the insurance survey report, the VALUE of the finished goods destroyed in the fire on 17/10/2002 was Rs.1.52 Crores and the value of raw materials both imported and indigenous, destroyed in the fire was Rs.69 lakhs. Duty on the raw materials contained in the finished goods amounted to Rs.73.46 lakhs and the duty involved in the raw materials which were damaged amounted to Rs.39.48 lakhs.

The appellant filed an application for remission of duty on the finished goods. They also sought permission from the department for destruction of the damaged goods and also sought a no objection for settlement of their insurance claim. The department informed the appellant that they have no objection for settling the claim with the insurance company, provided, the claim was only in respect of value part of the goods destroyed in fire. The department also asked the appellant for a certificate from the Chartered Accountant stating that the claim amount is without the Customs duty element.

The department wrote to the insurance company to discharge Customs duty of Rs.1.14 crores against insurance company's assessment of damaged goods of Rs.2.21 crores. The insurance company informed the department that the amount of customs duty had not been included and covered for the purpose of insurance policy taken by the insurer.

In September, 2004 the appellant sought remission of Customs duty on the value of imported inputs contained in the finished products which were destroyed.

Subsequently, the Customs authorities issued a SCN demanding Customs duty of Rs.1.14 crores being the duty on the raw materials contained in the finished products which were destroyed and also on the raw material imported/purchased locally which were damaged due to fire. The appellant paid a sum of Rs.15 lakhs in October, 2005 and requested for adjudication of the matter.

In March, 2006, the R/S as well as the AC, CEX, Belapur directed the assessee to pay balance of the Customs duty Rs.99.81 lakhs. The said letter was challenged before the Bombay High Court but the WP was dismissed.

A SCN dated 22/11/2006 was issued demanding a duty of Rs.1.12 crores payable on the raw materials contained in the finished product which were destroyed as also on the raw materials which were destroyed as such both in respect of imported raw materials as also indigenously procured raw materials. The demand was made in terms of the provisions of Section 72 of the Customs Act read with conditions laid down in the B-17 bond executed by them.

The CCE, Belapur confirmed the demand along with interest and, therefore, the appellant is before the CESTAT.

The appellant laid emphasis on the provisions of section 23 of the Customs Act, 1962 and rule 21 of the CER, 2002 and submitted that denial of remission by the adjudicating authority in respect of both the imported raw material as well as indigenous raw materials is unsustainable in law.

The Revenue representative submitted that the appellants were granted a licence under Section 58 and 65 of the Customs Act, 1962 for operating as a 100% EoU and condition No. 12 of the said licence stipulated that:

“The goods deposited in the warehouse should be fully insured by the warehouse keepers against theft, pilferage, fire accidents, other natural calamities, risk against rioting, etc. atleast for a value, equal to the customs duties by comprehensive, Insurance policy drawn in favour of the Commissioner of Customs.”

Reference is also made to the CBEC Circular No. 99/95 dated 20/09/1995 in this regard and also the conditions of the bond executed by the appellant in the matter of notification 52/2003-Cus & notfn. 1/95-CE read with the Central Excise (Removal of Goods at Concessional Rate of Duty for manufacture of Excisable Goods) Rules, 2001 which lead to the conclusion that the appellant is not entitled for any remission on account of raw materials lost or destroyed as such/contained in finished goods when the same were lying in the manufacturer's premises.

Reliance is also placed on the Calcutta High Court decision in Antarctica Ltd. wherein it is held that the provisions of Section 23 of the Customs Act, 1962 pre-supposes levy of duty first and thereafter remission thereof under the contingencies as stipulated in the said section; that if the goods were allowed to be imported on exemption of Customs duty and Excise duty, no question of remission would arise. The apex court decision in S.K.Pattanaik vs. State of Orissa is also referred.

The Bench extracted the provisions of sections 23, 58 & 65 of the Customs Act, 1962, rule 21 of the CER, 2002 and observed -

++ One of the conditions of the licence and warehousing bond executed by the appellant is that the appellant shall insure the goods deposited in the warehouse against theft, pilferage, fire accident and other natural calamities, etc. at least for a value equal to the Customs duty by a warehousing insurance policy drawn in favour of the Commissioner of Customs.

++ In the present case, it is an admitted position that, the appellant failed to insure the imported materials which were deposited in the warehouse for that part of the value representing Customs duty on the imported goods. While the appellant chose to insure the value of the imported goods minus duty, they deliberately failed to insure the goods for the Customs duty portion involved on the imported goods.

++ Thus, there is a clear breach of the terms and conditions of the warehousing licence issued under Section 58 of the Customs Act and the warehousing bond executed under Section 59 and also the manufacture-in-bond sanction granted under Section 65 of the said Customs Act. Having breached the terms and conditions of the licence and the manufacture-in-bond sanction, the appellant cannot seek to claim benefit under Section 23 of the Customs Act by remission of duty.

++ Section 23 is a general provision whereas Section 58 and 65 are specific provisions relating to warehousing and manufacture-in-bond. The conditions stipulated under the specific provisions have to be complied with in toto and the said provisions shall prevail over the general provisions prescribed u/s 23. It is a settled position in law that specific provisions shall prevail over the general provisions.

++ The appellant having failed to insure the goods for the Customs duty involved on the goods deposited in the warehouse, cannot seek benefit under Section 23 of the Customs Act. Therefore, demand of Customs duty on the imported raw materials which were destroyed in the fire as such or which were contained in the finished products destroyed is clearly sustainable in law and we hold accordingly.

In the matter of the duty demand on raw materials indigenously procured, the CESTAT observed that the said goods were procured following the procedure prescribed under the Central Excise (Removal of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 2001 and Explanation to rule 6 of the said Rules mandated that if the goods are lost or destroyed by natural causes or by unavoidable accidents during transport from the place of procurement to the manufacturer's premises or during handling or storage in the manufacturer's premises then it shall be deemed that the goods have not been used for the intended purpose and duty thereon is required to be paid. Inasmuch as the appellant cannot seek remission u/r 21 of the CER, 2002 as the condition of permission stipulates the appellant would be liable to pay excise duty if the goods are not used for the intended purpose. Moreover, notification 1/95-CE under which the goods have been procured stipulated that the goods have to be used in the manufacture of specific products which are required to be exported and since this condition is not satisfied, the appellant is liable to discharge duty on the raw materials destroyed during storage in the manufacturer's premises.

Holding that there is no merit in the appeal, the same was dismissed.

(See 2014-TIOL-933-CESTAT-MUM)