By TIOL New Service

NEW DELHI, DEC 09, 2016: THE raw materials imported against advance authorizations were exempt under Notifications No.43/2002-Cus and No. 93/2004-Cus.

Investigations were commenced by DRI in 2007 on alleged violation of the aforesaid Notifications for imports made under the cover of various advance licences obtained during the period 2003-04 to August 2007. The said investigation culminated as show-cause notice F. No.DRI/MZU/INV-04/07-08- URL/3533 dated 24th April 2009.

DRI vide letter No. DRI/BZU/G/INV-04/07-08/4150 dated 14th May 2009, intimated the DGFT also to initiate action against the appellants on the alleged misuse of the duty exemption scheme by the appellants.

In response to the said letter, the DGFT vide letter F. No.F-3/17/DRI/AM 07/ECA II/AD-229 dated 4th June, 2009 informed DRI that no action under FT Policy and FT (D&R) Act is warranted against the appellants since no evidence of diversion of imported goods has been reported and the appellants have deposited / will deposit customs duty on unutilized imported raw materials.

The SCN proposed to demand a total duty of Rs.14,53,74,294/- and imposing of penalty and interest.

During the course of investigation, an amount of Rs.3 crores has been paid by the appellants.

The Commissioner of Customs (Adjudication) Mumbai-I vide order-in-original dated 31st January, 2011, confirmed the demand raised in the show-cause notice against the appellants and imposed penalty of Rs.4,00,00,000/- each on directors / employees.

In appeal, the CESTAT vide impugned final order dated 23rd April, 2014 - 2014-TIOL-2969-CESTAT-MUM, dismissed the appeal on the following grounds:

a) Prior to fulfillment of export obligation, the finished goods manufactured out of duty free materials imported against advance licence cannot be cleared into domestic market.

b) Actual consumption of the manufacturer is efficient than specified in Standard Input Output Norm (SION) is violation of the para 4.28(v) of Handbook.

c) Goods are liable for confiscation under section 111(d) & (o).

d) Even though the goods are not available, fine is imposable. Relied upon in Weston Components Ltd. Vs. CC – 2002-TIOL-176-SC-CUS.

e) Penalty under section 114A has been upheld on the ground that appellants have diverted the raw materials imported duty free for manufacture of finished goods sold in the domestic market before fulfillment of export obligation.

f) Penalty under section 112(a) is imposable on the directors / employees.

Appellants have filed appeals before the Bombay High Court.

Elaborate submissions were made by both sides.

The High Court in a detailed order inter alia observed thus –

Demand of Rs.4,42,90,312/-

+ The Tribunal notes that the appellant imported Pencillin-G free of Customs duty. During visit to the said unit, no Pencillin-G or goods manufactured from the said Pencillin-G were found in the manufacturing unit. This implied that the goods manufactured out of the said Pencillin-G have been sold in the domestic market. This fact has also not been disputed by the appellant. They also do not dispute that export obligation was yet to be fulfilled.

+ The Revenue would not have objected if the appellant fulfilled the export obligation and thereafter used the imported raw material for manufacture of goods to be sold in the domestic market.

+ The tribunal concluded that the appellant has sold the product so manufactured in domestic market before export obligation was complete and this is a violation of the FTP. The tribunal, as a matter of fact, found that neither Pencillin-G nor the goods manufactured from that were in the factory. The export obligations in number of such advance licences/authorisations were yet to be fulfilled.

+ The Tribunal relies on Condition No. (vii) and concludes that in view of this condition sheet attached to the licence/authorisation that exempted material is required to be utilised in accordance with the Export Import Policy and relevant customs notifications would mean that the exemption available is to materials imported in to India against an advance licence issued in terms of sub paras (a) and (b) of para 4.1.1 of the Export Import Policy. We do not think that this conclusion of the tribunal is perverse or vitiated by an error apparent on the face of the record. However, we agree … that the amendment noted … above can be applied to the advance authorisations issued after April 2005. We modify the order of the Tribunal in that regard and direct reworking of the liability accordingly.

Demand of Rs.3,70,12,020/-

+ The tribunal found that admittedly the raw material imported was far in excess of the required quantity of the appellant. This fact was not brought to the notice of the licencing authorities. Therefore, they could have issued the licences as per the requirement. Even after duty free importation, the appellant has neither made additional exports nor paid the customs duty. The details were suppressed and came to light during the investigation. The reasoning in para 25 proceeds and, in our opinion rightly, on the footing that the advance licence or advance authorisation issued in terms of the FTP/Exim Policy and the exemption is granted subject to the terms and conditions in the notification, FTP/Hand Book of Procedures, then, it is futile to urge that para 4.28(v) of the Handbook of Procedures is contrary to the policy and the Customs notifications. The main argument that the Handbook of Procedures cannot restrict the scope of the policy has been rightly turned down and by accepting the arguments of the Revenue's representative.

+ The tribunal has rightly understood the issue to mean that import of duty free raw-materials is permitted for production of such goods which are to be exported. These are materials, which must be used for that purpose.

Duty demands of Rs.69,19,792/-, Rs.4,01,80,481/-,Rs.1,69,63,689/-.

+ The raw-materials were imported duty free. They were not utilised in execution of the export order. Had the investigation not been carried out, the assessee would have escaped with the violation. The tribunal also noted that the advance licences/authorisations were issued as per the declaration of the assessee and the method adopted and noted as above continued for five years. It is in these circumstances that the tribunal rightly agreed with the Revenue's advocate.

+ The excess raw-materials imported duty free having not been utilised as above, the tribunal found that the export obligation discharge certificate is yet to be obtained. The investigation started in 2007 and seven years are over. The items of export are bulk drugs, which have limited shelf life. Condition No. (v) of Notification No. 43 of 2002 and 93 of 2004 is not satisfied. The substantial liability was admitted and part of it is also paid. The tribunal, to our mind, did not commit any error in rejecting the appellant/assessee's contention.

Confiscation of goods, imposition of fine

+ We do not find the tribunal's view to be correct insofar as invocation of section 111(d) and confiscation there under. The tribunal's view is contrary to the factual position on record. To our mind, the tribunal has unnecessarily referred to section 111(d) when even the Revenue relied upon section 111(o).

+ The goods are liable to confiscation when they are imported relying on exemption notification, but that exemption is subject to a condition. If that condition is not observed, the Hon'ble Supreme Court held that the goods are liable to confiscation. The power of the customs authorities is held to be absolute. In these circumstances, we do not find that the appellants can escape from the judgment in the case of Sheshank Sea Foods Pvt. Ltd. - 2002-TIOL-142-SC-CUS.

+ We, therefore, set aside the tribunal's order in part, but uphold the confiscation of the goods to the extent the customs resorted to section 111(o) of the Customs Act, 1962.

Penalty

+ Once the penalty under section 114A is for short levy or non levy of duty in certain cases and a determination thereof is contemplated by section 28, then, unless and until the tribunal came to a conclusion that in the present case the determination followed a finding that there was collusion or willful misstatement or suppression of facts and the determination is, therefore, traceable to sub-section (4) of section 28 and not subsection (1) of section 28, it could not have proceeded to uphold the penalty as imposed.

+ The investigation may have revealed some acts and wilfully committed. However, when the tribunal mixed up the issue and did not apply its mind but justified the imposition on these general observations, then, we do not think that the penalty under section 114A on the assessee can be upheld.

+ The tribunal has also faulted the appellant for giving a false declaration while obtaining the licences. It has also justified the imposition of penalty for non-fulfillment of the export obligation under large number of licences, though the period for that is over long back. When such are the reasons assigned, then, which of it can be traceable to the statutory provisions referred above having not been clarified and explained, the tribunal's order in that regard cannot be upheld.

+ In the facts and circumstances of the case, clarity was required and consistent with the deliberate or intentional act attributable to the assessee, the penalty should have been imposed. That having not been done, we set aside the penalty imposed under section 114A of the Customs Act, 1962.

+ There was a confiscation of goods and which confiscation is traceable to clause (o) of section 111 of the Customs Act, 1962. That attracts the penalty under clause (a) of section 112 of the Customs Act, 1962. In the present case, we have upheld the act of confiscation of goods traceable to the above clause. Therefore, in relation to any goods, if any act or omission has been committed which would render such goods liable to confiscation, then, this penalty can be imposed.

+ We do not think that the finding of the tribunal's order to this extent [of imposing personal penalty on company officials] can be termed as perverse or vitiated by any error of law apparent on the face of the record. The appeals, to that extent challenging imposition of penalty are dismissed.

The appeals were partly allowed.

(See 2016-TIOL-2969-HC-MUM-CUS)