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Notification No. 91/2009-Cus dated 11th Sept. 2009 is in violation of FTDR Act, FTR Rules as well as FTP 2004-2009 and FTP 2009-2014 - On questions of interpretation of FTP, it is DGFT whose views will prevail: High Court

By TIOL News Service

NEW DELHI, MAY 27, 2016: THE validity of Customs Notification No. 91/2009 dated 11th September 2009 restricting the transfer/sale of goods imported using the Served From India Scheme ('SFIS') duty certificates/scrips for the purpose of payment of customs duty is challenged by the present Writ Petition.

It is contended that the said notification is violative of Articles 14, 19 (1) (g) and 300A of the Constitution of India, Section 25 of the CA, the FTDR Act, FTR Rules and the FTP 2009-14.

The Petitioner imported six ships between 10th January 2008 and 2nd March 2010& the customs duty on the import of the said vessels was paid using the SFIS duty credit scrips.

On 1st August 2013, the DGFT in exercise of the powers under Section 5 of the FTDR Act read with para 2.1 of the FTP 2009-14 amended para 3.12.7 of the FTP 2009-14 to read as under:

"3.12.7 Entitlement/goods (imported/procured) shall be non transferable (except within group company and managed hotels) and be subjected to Actual User condition. However, these goods can be alienated on completion of 3 years from the date of import/procurement."

By a letter dated 6th September 2013, the Petitioner informed the Joint DGFT that in view of the recent amendment to para 3.12.7 of FTP 2009-14, it would be going ahead with the sale of ship Greatship Amrita since the said vessel was imported more than three years earlier.

On the same day i.e. 6th September 2013 the Commerce Secretary wrote to the Secretary (Revenue) on this issue as under:

"We are dismayed to receive your D.O. letter No. 605/17/2013-DBK dated 8th August, 2013 in which you have conveyed your reservations about alienation of goods imported by utilisation of SFIS scrip. SFIS scrip is a duty credit scrip. Accordingly, an import consignment for which duty is paid by using SFIS scrip, involves technically a "payment of duty", except that the payment is not by cash/cheque/draft; but through a valid scrip. Hence no 'exemption' of duty is involved. This position is clearly stated in para 3.12.6 and 3.12.8. of FTP.

2. The corresponding DoR Notification relating to, use of SFIS issued from 2006 onwards along with Central Excise Circulars have also been examined carefully. The DoR Notification No. 34/006-CE dated 14.6.2006 and Central Excise Circular No. 837/14/2006-CX dated 3.11.2006 mentions in the subject "Procedure for debiting the original scrips issued under SFIS for payment of Central Excise Out in the case of domestic procurement of goods". The relevant portion in para 1 of the Central Excise Circular states:

"Duty Free credit scrips earned under the Scheme shall be permitted to be utilized for payment of excise duty in terms of the notification issued by Department of Revenue in this behalf for procurement from domestic sources of such inputs that are permitted for imports under para 3.6.4.5."

3. It may be appreciated that the phrase "duty free credit scrip" has been used incorrectly in the first sentence. The correct phrase should have been "duty credit scrips". The insistence by CBEC that goods imported by use of SFIS scrip may not be alienated unconditionally, even after three years of import, can be attributable to this inadvertent choice of words. Some restriction on alienation of an imported good is desirable when the import involves a corresponding obligation. Here the scrip itself is a benefit that has been "earned". Your letter also suggests that an alienation of goods imported procured under SFIS may attract duty. Saddling a benefit like this with additional conditions would be very harsh.

I request you to reconsider the issue."

Another letter was written on 10th December 2013, by the Commerce Secretary to the Revenue Secretary stating that it was not appropriate to compare SFIS with EPCG Scheme where the export obligation is mandated to be fulfilled in a specified period. According to the Commerce Ministry - "a 3 year period is sufficiently long time to ensure that the goods imported by an SFIS holder get depreciated. An exporter who has already paid duty on import through usage of SFIS scrips cannot be asked to pay the duty again and again on sale of goods after 3 years." A further letter was written on 17th/18th February 2014, by the Additional DGFT to the Joint Secretary (Drawback) requesting that the DoR should agree with the DGFT. It was pointed out that where any violation of the terms regarding alienation took place within three years and any such violation was pointed out, the DGFT would have no hesitation in taking action as per the FTDR Act.

The High Court considered the submissions made by both sides and thereafter observed -

DGFT is the final authority:

++ The SFIS forms part of the FTP 2004-2009 and has been continued under FTP 2009-2014 as well. The provisions concerning SFIS in both the FTPs are more or less similar. Clause 2.3 [Interpretation of Policy] of Chapter 2 of FTP 2004-2009 states that if any question or doubt arises in respect of the interpretation of any provision contained in FTP, or classification of any item in the ITC (HS) or HBP-v1 or HBP-v2, or Schedule of DEPB Rates (including content, scope or issue of an authorisation thereunder), the said question or doubt shall be referred to the DGFT whose decision thereon shall be final and binding.

++ The DGFT is a statutory authority exercising powers in terms of Section 6 of the FTDR Act. Under Section 6 (2) of the FTDR Act, the DGFT "shall advise the Central Government in the formulation of the FTP and shall be responsible for carrying out that policy." In exercise of his powers under Section 6 (2) of the FTDR Act, the DGFT has issued the HBP which is a part of the FTP manual. Since the DGFT is entrusted by the statute to implement the FTP, para 2.3 of the FTP 2004-2009 as well as para 2.3 of the FTP 2009-2014 have recognised the DGFT as being the final authority on all matters relating to the interpretation of the FTP. The slight change in FTP 2009-2014 is that under para 2.3(b) a Policy Interpretation Committee could be constituted to aid and advise the DGFT. Under Section 5 of the FTDR Act read with para 2.1 of the FTP 2009-2014, the DGFT has the power to make amendments to the FTP 2009-2014.

++ Para 3.6.4 of the FTP 2004-2009 as well as para 3.12 of the FTP 2009-2014 sets out the entire SFIS. The clauses sub-titled Objective, Eligibility, Entitlement, Remittances, Imports Allowed, Non-Transferability are identical under both FTPs. Relevant to the present case is para 3.6.4.5 of the FTP 2004-2009 (corresponding to para 3.12.6 of FTP 2009-2014) dealing with imports that are allowed. It states that the duty credit scrip may be used for import of any capital goods including spares, office equipment and professional equipment, etc. that are otherwise freely importable under ITC (HS). It states that the "imports shall relate to any service sector business of the applicant."

++ As regards non-transferability both para 3.6.4.6 of FTP 2004-2009 and para 3.12.7 of FTP 2009-2014 provide: "Entitlement/goods (imported/procured) shall be non-transferable (except within group company and managed hotels) and subject to Actual User condition."

++ In exercise of the powers under Section 5 of the FTDR Act read with para 2.1 of the FTP 2009-14, the DGFT issued Notification dated 1st August, 2013 amending para 3.12.7 of the FTP 2009-14 to provide that the goods imported/procured against SFIS scrips could be alienated on completion of three years from the date of import/procurement. In other words the policy of permitting transfer of imported capital goods, including those subject to an Actual User condition where duty has been paid using SFIS scrips, is continued under FTP 2009-2014.

++ As already noticed, it is the DGFT who issues the HBP. In terms of the FTDR Act, the DGFT is the final authority as far as the interpretation of the FTP is concerned. It is only where the HBP is contrary to or inconsistent with the FTP that the latter will prevail. However, since it is the DGFT who has the final word as regards the FTP, and not the Customs Department or any other authority, and it is the DGFT who issues the HBP as well, the question of the HBP not binding the DoR or the DGFT does not arise.

++ There is no specific provision that mandates that transfer of goods imported under the SFIS when FTP 2004-09 was in force, even after completion of three years from the date of import, can never be permitted to be transferred, except to a group company, or managed hotel or by way of re-export.

Validity of the impugned notification 91/2009-Cusdated 11th September 2009

++ The SFIS scheme is implemented by the DGFT working under the Ministry of Commerce. In terms of the FTDR Act, it is the DGFT who has the final word on interpretation of the FTP. Whether it is para 3.6.4.6 of FTP 2004-09 or para 3.12.7 of FTP 2009-14, both of which stipulate 'non-transferability' of goods imported under SFIS, the interpretation of the DGFT is final. The FTDR Act, FTR Rules, the FTP and the HBP are a complete code governing the SFIS. Para 3.12.7 of the FTP 2009-14 has been amended by the DGFT in exercise of his statutory powers under Section 5 of the FTDR Act with effect from 1st August 2013 to permit alienation of goods that have been imported on completion of three years from the date of import. The said notification being statutory in character should equally bind the DoR.

++ The present case reveals the impasse brought about on account of the inability of two ministries of the central government viz., the Commerce Ministry and the Finance Ministry, to reconcile their differences about permitting alienation of goods imported under the SFIS. Just as it is important to protect the revenues of the central government it is essential to honour the commitments to importers and exporters in the form of the various measures set out in the FTP which has the force of law having been made in exercise of the powers under the FTDR Act. It is therefore imperative that the FTDR Act, FTR Rules, the FTP, the HBP, the CA and notifications issued under the CA are viewed as forming part of one harmonious statutory scheme. They ought to be operationalised in a manner that is coordinated and harmonious and not at cross-purposes.

++ The notification dated 11th September 2009 issued by the DoR takes away what the amended para 3.12.7 of the FTP 2009-14 and para 2.43 of the HBP permits. It also takes away what para 3.6.4.6 of the FTP 2004-09 read with para 2.43 of the HBP permits. On the contrary, the DoR should have on its own issued a fresh notification consistent with the changes brought about to para 3.12.7 of FTP 2009-14.

++ There is merit in the contention that in the event of conflict of views between two ministries of the central government, the view taken by the ministry that is primarily responsible for the policy in question, which in this case is the FTP, should prevail. The SFIS was introduced by the Ministry of Commerce and its instrumentality, i.e. the DGFT has been statutorily entrusted with the final word on the interpretation of the FTP.

++ The letter dated 6th September 2013 from the Commerce Secretary to the Revenue Secretary is instructive. It refers to Circular No. 837/14/2006 dated 3rd November 2006 issued by the CBEC under the Ministry of Finance which acknowledged that payment of customs duty could be made by using the duty credit scrips. In particular, it was pointed out that the expression "duty free credit scrip" had been used incorrectly and that the correct phrase should have been "duty credit scrips". It was suggested that the "insistence by CBEC that goods imported by use of SFIS scrip may not be alienated unconditionally, even after three years of import, can be attributable to this inadvertent choice of words." Importantly it was pointed out that "the scrip itself is a benefit that has been 'earned'". This also answers the misconception of the DOR that customs duty can only be paid in cash, and that use of duty credit scrips is only 'revenue foregone'. The position has been explained by the Madras High Court in Tanfac Industries Ltd. where it was held that the goods cleared by using DEPB scrips for payment of duty should be treated as duty payable goods and not as duty exempted goods.

++ While it is not clear what revenue is sought to be protected in that process, it surely subjects the importer of goods that fall in the latter category to discrimination. Such denial of permission would attract the vice of impermissible discrimination in terms of Article 14 of the Constitution particularly since it is based on no rational criteria. In fact it contradicts the intent expressed in the relevant paras of the FTP 2004-09 and the HBP which have been adverted to. There is also nothing in the FTP which prohibits the sale of vessels that have completed more than three years after import from being sold in the domestic market. In other words, there is no justification for the DoR to insist that the vessels of the Petitioner that have completed more than three years after import should be transferred only by sale within group companies or managed hotels or be re-exported.

Conclusion:

+ The impugned Customs Notification No. 91/2009 dated 11th September 2009 issued under Section 25 (1) of the Customs Act to the extent it restricts the transfer/sale of goods imported using the SFIS duty certificates/scrips for the purpose of payment of customs duty, even where such goods satisfy the criteria for transferability under the FTP and HBP, is in violation of the FTDR Act, the FTR Rules as well as FTP 2004-2009 and FTP 2009-2014.

+ The letter dated 12th June 2013 issued by the DoR asking the DGFT to keep in abeyance the NOC granted by the PRC on 9th April 2013 is contrary to the legal position explained above and can have no binding effect on the DGFT. On questions of interpretation of the FTP, it is the DGFT whose views will prevail.

Order:

The DoR is restrained from objecting to the transfer/sale of the vessels Greatship Aarti, Greatship Ahalya, Greatship Amrita, Greatship Anjali and Greatship Asmi belonging to the Petitioner since each of the said vessels has been imported more than five years ago.

The writ petition was disposed of.

(See 2016-TIOL-1018-HC-DEL-CUS)


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Sub: Customs Vs DGFT

The said judgement of the Hon'ble High Court is contrary to the Hon'ble Supreme Court Decision in the case of Commissioner of Customs, Hyderabad Versus Pennar Industries Ltd {2015-TIOL-162-SC-CUSTOMS ACT, 1962}and Sheshank Sea Foods Pvt. Ltd. v. Union of India {2002-TIOL-142-SC-CUS} It was held that even if DGFT holds that export obligation is fulfilled, it is not binding on Customs. When there is breach of the condition in the Exemption Notification demand is sustainable. There is no provision in FTP or the Hand Book of Procedure issued by the Ministry of Commerce, Government of India, taking away the power of the Customs authorities to investigate an alleged breach of provisions of Customs Act, 1962 or the Notifications issued thereunder.

Posted by addalarangadham addalarangadham
 

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