MARCH 20, 2019

By Srinidhi Ganeshan & Lakshmi Menon

1. WAREHOUSING of goods, post its import into a country, and prior to its clearance for home consumption, is a popular method for duty deferment across the world. In India, warehousing of goods is also undertaken to accomplish certain labelling/packing operations on the imported goods so as to render them compliant with laws of India such as the Legal Metrology Act, 2009, Food Safety & Standards Act, 2006, Drugs & Cosmetics Act, 1940 etc.. If the packaging, labelling or other defined parameters of the imported goods are not compliant with the laws of India, the imported goods will not be permitted to be cleared for home consumption by the Customs authorities.

Law governing warehouses

2. The substantive provisions pertaining to warehousing are set out in Chapter IX of the Customs Act, 1962 ('Customs Act'). Public Warehouses are licensed under Section 57 of the Customs Act, while Private Warehouses are licensed under Section 58 of the Customs Act. In Private Warehouses, only the goods belonging to the holder of the Private Warehouse License can be stored. While in Public Warehouses, only the goods belonging to third parties can be stored.

3. The provisions of the Customs Act permit the owner of the goods to carry out various activities on the warehoused goods. Section 64 of the Customs Act permits certain activities like inspection, sorting, displaying of the goods for sale to be carried out by the owner without obtaining permission from Customs officers.

4. If the owner of the warehoused goods wants to undertake any other activities (other than what is permitted under Section 64 of the Customs Act), they can do so after complying with the conditions set out under Section 65 of Customs Act.

5. Section 65 states that with the permission of the Principal Commissioner of Customs or Commissioner of Customs, and subject to such conditions as may be prescribed, the owner of any warehoused goods may carry on any manufacturing process or other operations in the warehouse in relation to such goods.¹ Accordingly, 'Manufacture & Other Operations in Warehouse Regulations, 1966' ("MOOWR") have been enacted to regulate activities under Section 65 of the Customs Act. Thus, any person intending to undertake manufacture or other operations on warehoused goods must apply under MOOWR and obtain a sanction for carrying out such activity.

6. From a perusal of Section 64 vis-à-vis Section 65, it flows that the activities of packing/ re-packing/labelling/re-labelling will not fall within the scope of the permissible activities of Section 64 of the Customs Act. Thus, these activities can be undertaken only in terms of Section 65 of the Customs Act.

Section 65 - Applicable to Public Warehouse or Private Warehouse?

7. From a reading of Section 65 of the Customs Act as well as MOOWR, it is evident that the provision applies to 'warehouse' and 'warehoused goods' as defined under the Customs Act, 1962. 'Warehoused goods' are defined by Section 2(44) of the Customs Act as goods deposited in a warehouse. As per Section 2(43), 'Warehouse' under the Customs Act 'means a public warehouse licensed under section 57 or a private warehouse licensed under section 58 or a special warehouse licensed under section 58A'.

8. Thus, on conjoint reading of the provisions of the Customs Act and MOOWR, it becomes clear that manufacturing and other activities can be carried out in public as well as private warehouses. In fact, this was the understanding in place, across the industry and across all Customs Houses until 17.10.2018. No distinction was being drawn in terms of the operations that could be carried out in a Private or a Public Warehouse.

Issuance of Circular & its subsequent modification

9. In the above background, Circular No. 38/2018-Cus dated 18.10.2018 was issued by the CBIC. T his Circular stated that for carrying on the activities of manufacturing and other activities permitted under Section 65 of the Customs Act the premises must also be licensed as a Private Warehouse. The Circular has been interpreted by the Customs Houses to mean that activities of manufacturing and other activities permitted under Section 65 of the Customs Act can no longer be carried out in a Public Warehouse. In other words, activities falling within the purview of Section 65 can only be undertaken in private warehouses.

10. Thus, from 18.10.2018 onwards, the trade is in difficulty and hardship as the Customs Houses are refusing to grant permission to importers for carrying out activities of manufacturing and other activities in Public Warehouses. Difficulty was being faced more so by those importers who were undertaking labelling activity etc. in the public warehouses.

11. Numerous representations were made in this regard. The applicability of Circular No. 38/2018-Cus was accordingly suspended till 31.1.2019 vide Circular No. 53/2018-Cus dated 28.12.2018. Thereafter, Circular No. 3/2019-Cus dated 31.1.2019 was issued by CBIC, modifying the earlier Circular No. 38/2018-Cus.

12. Circular No. 3/2019-Cus refers to activities like labelling/packing etc. carried out by importers to comply with Indian laws and states that labelling/fixing RSP etc. undertaken to fulfil statutory compliance requirements, may be carried out in all warehouses, without obtaining separate permission under Section 65 of the Customs Act.

Lack of clarity in Circulars issued

13. The relief given by Circular No. 3/2019-Cus, in paragraph 3 is for 'labelling/fixing RSP etc. to fulfil statutory compliance requirements'. However, it is silent on what qualifies as permissible operations under Section 65 and whether such operations can also be undertaken in public bonded warehouses. For instance, currently many importers are undertaking conversion from bulk to retail packaging at the public warehouses. There is no restriction against clearance of goods for home consumption in bulk packaging under the allied laws such as Legal Metrology etc. Thus, as re-packing is not legally mandated, will this mean that conversion to retail packaging will not be permitted within a public warehouse and can be undertaken only in a private warehouse?

14. The Circulars issued by the CBIC regarding activities that can be carried out in warehouses can, therefore, be summarized as follows:

(a) Only activities like labelling/packing etc., undertaken to fulfil statutory compliance requirements can be undertaken in Public & Private warehouses without obtaining a permission under Section 65 of the Customs Act;

(b) Any activities other than the above and other than what is set out in Section 64 of the Customs Act, cannot be undertaken in a Public Warehouse.

Conclusion

15. It appears that CBIC is keen to narrow down the scope of the activities permitted in Public Warehouses. The same is contrary to the Customs Act, 1962. It is an established principle of law that Circulars cannot modify the law or curtail the ambit of the provisions of the Statute. Thus, the legal validity of the circulars is questionable.

16. In conclusion, the recent Circulars, though intended to ease warehousing procedures, have only managed to complicate the same, and have given rise to numerous uncertainties. These uncertainties not only disrupt operations of importers but are also paving the way for future litigations.

(The authors are Principal Associate & Joint Partner respectively, Lakshmikumaran & Sridharan, Mumbai and the views expressed are strictly personal.)

¹'Prescribed' has been defined by Section 2(32) of the Customs Act to mean "prescribed by Regulations".