By TIOL News Service

HYDERABAD, OCT 16, 2017: THE Facts:

The Revenue is in appeals before the high Court challenging the orders of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) allowing the claims for refund made by the Assessee.

The respondent-Assessee imported timber logs. Refund claims were filed under Notification No 102/2007 Cus for refund of Additional duty of Customs (SAD) as the imported goods were sold on payment of VAT. However, refund claims were allowed only on the logs sold as such and in cases where the logs were sold as  “cut sizes” , refund was denied by relying on the CBEC Circular No. 15/2010 Cus dated 29.06.2010. Commissioner (Appeals) also upheld the adjudication orders. The CESTAT allowed the appeals (2016-TIOL-296-CESTAT-HYD) relying upon the decision of the Gujarat High Court in Commissioner of Customs v. Variety Lumbers Private Limited (2012 TIOL-821-HC-AHM-CUS). The Tribunal took note of the fact that as against the judgment of Gujarat High Court, Special Leave Petitions were filed and that the Supreme Court had already granted leave and issued notices, but did not grant an interim stay of the judgment of Gujarat High Court. (2012-TIOL-98-SC-CUS)

Against the orders of the CESTAT, the Department did not immediately file statutory appeals before the High Court, but chose to file Miscellaneous Applications before the CESTAT seeking a modification of the order of the CESTAT on the short ground that the CESTAT should have directed the respondent-assessee to furnish bank guarantee at least to the extent of 50% of the amount of refund ordered by the Tribunal, as per the interim order passed by the Supreme Court in the appeals filed against the judgment of the Gujarat High Court. These applications for modifications were dismissed by the CESTAT on the ground that after the disposal of the appeals, the Tribunal had become functus officio .

Even after the Miscellaneous Applications were dismissed by the CESTAT, the Department refused to grant refund on the ground that the Supreme Court had ordered bank guarantee in some other case. The respondent-assessee filed writ petitions seeking a direction to the department to grant refund as per the orders of the CESTAT. In the writ petitions, the department took a stand that they had already filed appeals under Section 130A of the Act as against the orders of the CESTAT. But after finding that there were actually no appeals registered on the file of the Court, the High Court allowed the writ petitions and directed the refund to be made. It was recorded in the said order that the order passed by the CESTAT, had attained finality as on the date of disposal of the writ petitions and that therefore, the department had no alternative but to refund the amount.

Thereafter, the appellant/revenue came up with the present appeals with applications for condonation of delay. Despite stiff opposition from the respondent-assessee, the High Court allowed the delay condonation applications, only in view of the fact that the matter required examination, in view of the Supreme Court granting leave to appeal against the judgment of Gujarat High Court.

The substantial questions of law with which the appellant/ revenue has come up are:

1. Whether the CESTAT was justified in placing reliance on Commissioner of Customs vs. M/s. Variety Lumbers Pvt. Ltd., and C.C. Kandla vs. M/s. Agrawala Timbers Pvt. Ltd ., where the appellant Department had filed Appeal before the Supreme Court and the same is pending for adjudication?

2. Whether the CESTAT was justified in allowing the respondent's appeal and declaring that the respondent is eligible for refund of SAD relying on the judgment in Commissioner of Customs Vs. M/s. Variety Lumbers Pvt. Ltd., and C.C. Kandla Vs. M/s. Agarwala Timbers Pvt. Ltd ., without imposing any condition to protect the interests of the appellant and thereby departing from the order of the Supreme Court wherein the Supreme Court imposed a condition that the respondent should furnish bank guarantee security for half of the amount to the satisfaction of the appellant department's Assessing Officer?

The high Court observed,

A careful look at the above questions of law would show that the first question of law revolves around the entitlement of the respondent-assessee to refund. The second question of law, even if answered in favour of the revenue, would still entitle the respondent-assessee to receive the refund, but after furnishing bank guarantee to the extent of 50% of the amount refunded, in the light of the interim order passed by the Supreme Court in the appeal arising out of the judgment of Gujarat High Court in Variety Lumbers Pvt. Ltd . In other words, the first question of law is the real substantial question of law into which the second question of law would get merged.

Admittedly, the Supreme Court did not grant interim stay of the judgment of the Gujarat High Court in Variety Lumbers Pvt. Ltd . On the contrary, the Supreme Court directed the refund subject to the assessee furnishing bank guarantee to the tune of 50% of the amount of refund.

Effect of appeal before Supreme Court : The High Court observed,

The grant of leave by the Supreme Court, as against the judgment of a High Court, does not have the effect of wiping out any principle of law laid down by the High Court. Even in cases where a stay is granted by the Supreme court, the question would depend upon whether an interim stay was granted of the operation of the judgment of the High Court or of the further proceedings pursuant to the order of the High Court. If an interim stay of operation of the judgment of the High Court is granted by the Supreme Court, then it could possibly be argued that the judgment of the High Court cannot be followed as a precedent. Even in such cases, there is no embargo upon the other High Courts to follow the reasoning adopted by the High Court whose judgment was stayed by the Supreme Court, to come to the very same conclusion.

In cases where an interim stay is granted by the Supreme Court only in respect of further proceedings, the principle of law laid down by the High Court does not get automatically suspended. In cases where no stay is granted by the Supreme Court, the Tribunal is entitled to follow the judgment of the High Court that is under appeal.

In the case on hand, the Supreme Court did not grant either a stay of operation of the judgment or a stay of further proceedings pursuant to the judgment of the Gujarat High Court. Therefore, the Tribunal was bound to follow the judgment of the Gujarat High Court and the first question of law has to be answered in favour of the respondent-assessee .

Despite the above conclusion on first question of law, the High Court also went into the more fundamental question, to test the genuineness of the grievance of the appellant/revenue. The grievance of the appellant/revenue is that a person not entitled to the benefit of exemption notification, cannot walk away with a refund. According to the appellant/revenue, the department was fair enough to order refund of a portion of the claim, wherever the jurisdictional Customs Officer noted that the imported timber logs were sold as such in the local market without being cut into smaller sizes and wherever they matched with the description contained in the packing list. The claim of the department is that an importer is not entitled to exemption, if the imported material was converted into something else and if the goods sold locally do not match the description contained in the packing list.

The High Court observed,

But, unfortunately, for the appellant/revenue, the requirement to sell the imported goods as such in the local market, is not one of the conditions stipulated in the exemption notification.

It is not indicated anywhere in the notification that the imported goods should be sold as such, so as to qualify for exemption. All that the notification says is that the imported goods should be sold locally and that the conditions stipulated in para-2 should be fulfilled.

As rightly observed by the Gujarat High Court, the timber logs imported by any one, when cut into smaller logs, do not lose the character of being timber logs. Moreover, the size of timber logs that could be imported in huge ships, will be so large that they cannot be transported locally in trucks on roads. What the department had done, is to read one more condition into the exemption notification, which is not found in the notification itself.

Effect of Board Circular : The counsel for Revenue placed heavy reliance upon a Board Circular bearing No.15/2010-Customs, dated 29-6-2010, wherein the Government imposed certain conditions in order to prevent fraudulent claims by unscrupulous importers.

On the basis of the above circular, it is contended by the senior standing counsel for the department that the moment the imported goods undergo some change, they would lose the benefit of the exemption notification, since the goods originally imported may fall under one classification while those that are obtained after a process, may fall under a different classification. In the case of the assessee itself, the round and square logs of wood come under classification Heading 4403, whereas sawn wood falls under classification Heading 4407. Therefore, it is contended by the senior standing counsel for the department that the moment the imported goods are subjected to some process, they would go out of the purview of the exemption notification.

But, the High Court did not agree and observed,

It is not the case of the department that goods falling under one classification are entitled to exemption and the goods falling under another classification are not entitled to exemption. What is claimed is only the refund of the special additional duty. The special additional duty is payable on the goods that fall under the First Schedule to the Customs Tariff Act 1975, in terms of Section 3 (5) of the Act. It is not the case of the department that round/square logs falling under Heading 4403 alone are entitled to exemption and that sawn woods falling under Heading 4407 are not entitled to exemption.

As a matter of fact, Circular No.15/2010, dated 29-06-2010 has virtually amended the exemption notification. It is needless to point out that by a Circular or executive fiat, an exemption notification issued in exercise of the statutory power, cannot be amended. Hence, the reliance placed upon the circular is unfounded.

The Appellate Maze :

The High Court observed,

We should also add that today the department is not even entitled to raise the first substantial question of law before us. If the department wanted to raise the first substantial question of law, they should have come up with the appeals under Section 130A of the Act immediately after the CESTAT disposed of the appeals, but the department did not do so. On the contrary, they moved the Tribunal with Miscellaneous Applications for modification. What was prayed for in the Miscellaneous Applications for modification was only to impose a condition that the assessee should furnish bank guarantee for 50% of the amount of refund. It is only after the Miscellaneous Applications were dismissed by the Tribunal that the department has chosen to come up with the substantial appeals as against the original order of the Tribunal.

Let us assume for a minute that the Miscellaneous Applications filed by the Department were allowed by the Tribunal and the original order of the Tribunal passed in the appeals modified. In such an event, the department could not have challenged, the original order of the Tribunal, on the principle of waiver. Therefore, we could have dismissed all these appeals on the first substantial question of law, as not maintainable, in view of the department going before the Tribunal with a limited grievance. However, we chose to take the bull by its horns.

In fine, the first substantial question of law is answered against the appellant/revenue.

The second question of law raised by the appellant is as to whether the Tribunal could have granted refund without imposing a condition, as imposed by the Supreme Court in the appeals arising out of the decision of the Gujarat High Court in Variety Lumbers Pvt. Ltd .

The High Court observed,

The brief interim order passed by the Supreme Court on 24-11-2011 while granting leave to the Commissioner of Customs in Variety Lumbers, reads as follows:

"In the meanwhile, the claims of the respondents for refund of Special Countervailing Duty, shall be processed by the Assessing Officer and the amount so due to them shall be refunded within four weeks from today, subject to the respondents furnishing bank guarantees for half of the amount to be refunded, to the satisfaction of the Assessing Officer. The guarantees shall be kept alive till disposal of these appeals. The quantum of payment of interest to the successful party shall be considered at the time of final disposal of the appeals."

As rightly contended by Mr. K. Vijay Kumar, counsel for the respondent-assessee, the interim order of the Supreme Court extracted above, is dated 24-11-2011. The orders-in-original were passed in all these appeals, on 08-01-2013, 28-09-2012, 05-11-2012, 20-12-2012, 10-05-2013, 20-12-2012, 08-10-2012, 17-09-2012, 24-09-2012 and 05-11-2012.

In other words, the orders-in-original, out of which all the present appeals arise, were passed long after the interim order of the Supreme Court dated 24-11-2011. Therefore, the Jurisdictional Customs Officer, instead of showing great valour in challenging the ratio laid down by the Gujarat High Court, could have simply allowed all the refund claims with a brief order to the effect that the refund claims are allowed (i) subject to the outcome of the appeal before the Supreme Court and (ii) subject to the further condition that a bank guarantee is furnished for half of the amount claimed as refund. The Original Authority did not adopt such a course of action, despite having the benefit of the interim order of the Supreme Court passed in Variety Lumbers Pvt. Ltd . Even the Commissioner (Appeals) did not take recourse to such an option. Therefore, today the department cannot find fault with the CESTAT not passing a similar order as passed by the Supreme Court in Variety Lumbers Pvt. Ltd ., especially when the Original Authority as well as the Appellate Authority themselves did not choose to follow the interim order of the Supreme Court.

As a matter of fact, if the adjudicating authority had passed orders-in-original incorporating the same conditions as found in the interim order of the Supreme Court in Variety Lumbers Pvt. Ltd ., incorporating a condition that the refund was ordered subject to the outcome of the decision before the Supreme Court, the department would have been better of. If the original authority had passed such an order, the department would have become entitled to recover the amount of refund, in the event of their success before the Supreme Court in Variety Lumbers Pvt. Ltd . The department let go this opportunity and invited an order on merits from the Tribunal. After suffering an order on merits from the Tribunal and without challenging the same, the department went before the Tribunal requesting them to incorporate the conditions as found in the interim order of the Supreme court. This is why the Tribunal rejected the Miscellaneous Applications.

Even if the Tribunal had allowed the Miscellaneous Applications, the department could not have achieved anything, in the event of their success before the Supreme Court. Unless the department itself had ordered refund subject to the outcome of the appeal before the Supreme Court, the department could not have achieved anything merely by making the Tribunal incorporate a condition for furnishing of bank guarantee to the extent of 50%. Therefore, the Tribunal was right in rejecting the Miscellaneous Applications and hence, the second substantial of law is answered against the appellant/revenue.

As a consequence, all the appeals are dismissed.

(See 2017-TIOL-2165-HC-AP-CUS)