By TIOL News Service

NEW DELHI, AUG 01, 2015 : THE assessee had imported hot rolled non-alloy steel wide coils against an advance licence issued under the Duty Exemption Entitlement Certificate (DEEC) Scheme. At the time of imports, the assessee did not pay the import duty on the aforesaid materials taking umbrage under Notification No. 30/1997, as amended on 01.04.1997. This Notification allows actual users to import the raw material duty-free with the condition that the said material would be used by the importer itself and converted into specified finished goods and thereafter those goods would be exported as per the export obligations given in the advance licences. As per this obligation, the assessee was supposed to effect export of 1000 MTs cold rolled non-alloy steel (hard) coils and 1500 MTs of CRCA skin based steel strips/coils totalling 2500 MTs.

It is an admitted case that the raw material was used by the assessee itself for manufacturing the specified products. However, no exports were effected by exporting those goods so manufactured from the raw material that was imported duty-free. As per the assessee, after manufacturing of the goods from the raw material, it was found that quality of those goods was not good enough for the purposes of exports. Therefore, instead of exporting this material, the assessee disposed of the said manufactured gods in the domestic market. At the same time, in order to meet the export obligation under the said licences, it arranged the export through one M/s. Steel Company, Gujarat as its supporting manufacturer.

The appellant/Revenue was not amused with the aforesaid manner of fulfilling the export obligation by the assessee. According to the Revenue, conditions contained in Notification No. 30/1997 had not been complied with, by the aforesaid third party export, as the Notification in question mandated the export of that very product which was to be manufactured out of the imported raw material and, therefore, the exemption claimed under the aforesaid Notification was unjustified. The Revenue, thus, issued show-cause notice dated 30.03.2002 demanding the duty in the sum of 1,65,07,454 along with interest @ 24% from the date of clearance. The Commissioner of Customs, confirmed the demand made in the show-cause notice. He also imposed a penalty of 10 lakhs.

The CESTAT has, allowed the appeal by arriving at a conclusion that Director General of Foreign Trade ('DGFT') had passed an order making amendment in the licence issued under the DEEC Scheme which effectively changed the products. Amendment was also made in respect of nature of exports to be effected through third party exports. Therefore, when the DGFT had amended the licence permitting such an export through third party, it amounted to fulfilling the export obligations as this changed position had to be reckoned. On that basis, allowing the appeal, the order of the Commissioner has been set aside. I

It is this order of the CESTAT which is under attack in the present appeals filed by the Revenue.

The Supreme Court observed,

From the reading of this Notification, it becomes clear that the material which is imported has to be against an advance licence with actual user condition in terms of para 7.4 of the EXIM Policy 1997-2000. It is not in dispute that the assessee was in possession of such an advance licence issued by DGFT and this licence was with actual user condition, namely, the material so imported was to be used by the assessee itself in its factory for manufacturing the items specified therein. As per Condition No. (ii), the assessee was required to execute a bond at the time of clearance of the imported materials to pay on demand an amount equal to the duty leviable, but for the exemption, on the imported materials in respect of which the conditions specified in this Notification have not been complied with, together with interest @ 24% per annum from the date of clearance of the said materials. The export obligation was contained in the licence issued by the DGFT, which was to be adjusted during the period specified in the said certificate or within such extended period, as may be granted by the licensing authority (DGFT in this case). The assessee was supposed to produce evidence of discharge of export obligation to the satisfaction of the Assistant Commissioner of Customs within a period of 30 days of the expiry of the period allowed for fulfillment of the export obligation or within extended period as allowed. Stringent stipulation is contained in Condition (vii), which is very significant and relevant for our purposes. The respondent was not supposed to dispose of or utilize the exempt materials in any manner except for utilization in discharge of the export obligation.

It would mean that not only the raw material imported (in respect of which exemption from duty is sought) is to be utilised in the manner mentioned, namely, for manufacture of specified products by the importer/assessee itself, this very material has to be utilised in discharge of export obligation. It, thus, becomes abundantly clear that as per this Notification, in order to avail the exemption from import duty, it is necessary to make export of the product manufactured from that very raw material which is imported. This condition is admittedly not fulfilled by the assessee as there is no export of the goods from the raw material so utilised. Instead, export is of the product manufactured from other material, that too through third party. Therefore, in stricto senso, the mandate of the said Notification has not been fulfilled by the assessee."

In such a scenario, whether amendment of the licence by the DGFT allowing export obligation to be fulfilled through third party would tantamount to meeting the requirement of the Notification is the central issue to be answered.

The Supreme Court observed,

In the present case, advance licence was issued to the assessee in terms of para 7.4 of the EXIM Policy 1997-2000. It was in terms of this licence that the import of the specified material was permitted on the condition that the assessee is obligated to meet the export obligation as contained in the licence issued by the DGFT. No doubt, this obligation in the export licence, read with conditions contained in Notification No. 30/1997, puts the onus upon the assessee to make the exports of the products produced from the material so imported. However, it is the case of the assessee that for certain bona fide reasons (as the bona fides of the assessee have been accepted by the DGFT), as the assessee was not able to export same very goods produced by it from the material imported on which he was given exemption from payment of the import duty, the DGFT allowed the assessee to meet the export obligation through third party.

It is also correct that insofar as DGFT is concerned, it has passed Order-in-Original dated 03.08.2011 holding that the export through third party would tantamount to fulfilling the export obligation contained in the licence. However, since the total import entitlement of the firm, as per the amended licences, worked to 2123.1538 MTs and the assessee had imported 2712.41 MTs, it resulted in excess import of 589.26 MTs. Therefore, only on this excess import, customs duty was payable, which was directed to be paid along with interest calculated @ 15% from the date of first import to the date on which last consignment of exports were effected by the assessee through third party. The DGFT, in its order, also mentioned that there was no misutilization of the raw material imported by the assessee and there was no violation of any other conditions of the licence causing Revenue loss at the cost of exchequer.

The aforesaid Order-in-Original of DGFT was under the provisions of EXIM Policy. It is held by this Court in Sheshank Sea Foods Pvt. Ltd that the same would not be binding on the customs authorities and as far as action taken under the Customs Act is concerned, the same is to be covered by the provisions of the Customs Act.

The decision in the aforesaid case, which is of the Coordinate Bench, binds us.

Since the conditions of the exemption notification are not fulfilled and the law requires strict compliance of the exemption notification, the assessee becomes liable to pay the import duty which was payable, but for the benefit of exemption Notification No 30/1997, which was obtained by the assessee.

Suggestion to Government to make provision for such situations: The Supreme Court observed, "Though we have rendered this decision keeping in view the legal position discussed above, at the same time, we deem it necessary to observe that the Government should bestow its consideration and make appropriate provision dealing with such situations. After all, the Exemption Notification No. 30/1997 has been issued to implement and effect the EXIM Policy provisions. Therefore, the purport of the exemption notification is to advance the objectives of the EXIM Policy. When the DGFT has itself accepted the benefits of the assessee and carried out the amendment in the import licence and further that the assessee could make the exports on the basis of the amendment; albeit through third party, such person should not be left high and dry. Therefore, necessary amendments are needed in such notifications making appropriate provisions to meet these types of eventualities. We are hopeful that the competent authority shall look into these aspects and cater for such situations as well so that unnecessary hardship is not caused to the bona fide assessees as well."

Interest reduced: The Court observed, "Insofar as charge of interest is concerned, we are conscious of the fact that as per the bond the assessee had agreed to pay interest @ 24% per annum. However, that would not take away our right to reduce the rate of interest if the ends of justice so warrant. In the peculiar facts of this case, more so when there was an amendment in the licence by the DGFT and DGFT has taken the view that export obligation is fulfilled, we deem it proper to reduce the rate of interest from 24% per annum to 9% per annum. Further, there shall not be any penalty."

(See 2015-TIOL-162-SC-CUS)