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Cus - EXIM Policy restricted import of ATMs, ATMPs & Modems to actual users qualified to be issued with special licence - imports without such a licence entails liability to confiscation of goods u/s 111 & penalties u/s 112 of CA, 1962: CESTAT

By TIOL News Service

MUMBAI, JAN 03, 2018: THESE are appeals filed against the orders passed by the Commissioner of Customs (Adjudication), Mumbai in November 2007 and wherein inter alia penalties were imposed on the appellants.

Incidentally, the appeal of the importer, who filed the bill of entry and who was proceeded u/s 28 of Customs Act, 1962 for recovery of duty that was short-paid at the time of import, was dismissed for non-compliance with requirements of pre-deposit and since they failed to get relief from the Supreme Court, the demand based on re-classification and re-determination of value had attained finality.

The allegations in the notices - Three different goods viz. 'modems', 'automated teller machines' and 'automated teller machine processors' - were mis-declared as 'parts' & 'electricals' and by concealing their true values with an intent to evade duties of customs and the licencing requirements under the Export Import Policy in vogue at the time of import and which is 1987 - 1989.


As part of their automation programme, M/s Hongkong & Shanghai Banking Corporation Ltd and M/s Citibank, NA, both with branches in India, placed order with M/s Philips Holland for supply of machines that required the 'processors' and 'modems' for functioning.

The 'automated teller machines' manufactured by M/s Diebold, USA were marketed by M/s Philips Holland who had exclusive rights for the entire globe except the country of manufacture. These were supplied to M/s Exportek, Belgium who shipped them to M/s Hindustan Engineering Corporation in India. M/s Phillips Holland manufactured 'automated teller machines processors' at Jarfalla, Sweden and were supplied to M/s Exportek Belgium who shipped these to M/s Hindustan Engineering Corporation. The importer filed bills of entry declared them as 'parts and electricals', allegedly with intent to suppress the true nature of the goods and their value.

According to the impugned order, Shri JP Mody owned a number of entities that were made use of for the procurement and supply of the functional machines to the two banks in India. Allegedly, the machines and processors were disassembled at Belgium and, after inventorisation of the parts thereof in Belgium under the supervision of S/shri JP Mody, Suketu Mody and AA Ansari, were despatched for presentation before Customs authorities in India as parts and electricals. Central to the findings is the alleged lack of capacity and facilities with any of the companies in the JP Mody group for manufacture of the machines and components claimed to have been supplied with the attendant implication of import of 'modems', 'machines' and 'processors' in the guise of some other descriptions.

Allegedly, the camouflage of the import of 'modems', 'machines' and 'processors' in the modus operandi was the apparently unconnected placing of import order with M/s Exportek, Belgium by M/s Hindustan Engineering Corporation who procured the goods, M/s TRT, France (a company within the Philips group), M/s Diebold, USA and from M/s Philips Holland.

According to the impugned order, this complex chain was established to enable procurement of 'modems' from the Philips group of companies, as per the worldwide supply agreement between the two banks and M/s Philips Holland, the exclusive marketing agency or the manufacturer, by circumventing the rigour of the licencing and duty regime that was extant then. It was held that a Philips group company, M/s TRT France, manufactured the specific models of 'modems' required by the banks and which could, under an exclusive marketing arrangement, be supplied only by M/s Philips Holland; likewise for the other components. Allegedly, Shri JP Mody having arranged that M/s Exportek, Belgium would procure these goods for shipment to M/s Hindustan Engineering Corporation, a JP Mody entity, who would clear the goods, described in the invoice as 'parts of control panel/ control switches' and declared in the bills of entry as 'electricals.' These were then allegedly made available to the entities holding the purchase orders from M/s Peico Electronics & Electricals Ltd for fulfilment of contract of the banks.

The three show cause notices covered the importer, the group companies and their directors/employee, M/s Peico Electronics & Electricals Ltd and two of its employees, M/s Hongkong Shanghai Banking Corporation and M/s Citibank.

Elaborate submissions were made by the appellants before the CESTAT on a number of days along with case laws to conclude that baseless allegation had been preferred in the show cause notice that were replicated in the adjudication order imposing penalties.

Countering the arguments, the AR too, in a lengthy note,submitted that it was undoubtedly clear that there was no factory for manufacture of the machines, processors or modems; for the want of technology and not being in possession of any import licence or industrial licence there was no justification for the claim that the importer was capable of manufacturing the finished goods that were claimed to have been manufactured from these parts. Furthermore, law requires that the imported goods were to be assessed as presented and these being imported in disassembled form are nothing but machines, processors and modems; the decision of the Hon'ble Supreme Court in  Sharp Business Machines P Ltd 2002-TIOL-283-SC-CUS   and in Phoenix International Ltd 2007-TIOL-165-SC-CUS   were cited in support.

It is further submitted that ATMs, ATMPs and Modems, being goods specified in Schedule I to Import Control Order, 1955 issued in exercise of the powers conferred under section 3 or the Import & Export (Control) Act, 1947, are restricted for import except against special import licence (SIL) allowed for actual users with Schedule V of the Order prescribing "actual use in a factory by a manufacturer" for import of parts and components. Thus, these are prohibited goods which the repeal of the Import & Export (Control) Act, 1947 or the supersession of the Import Control Order, 1955 would not prevent the invoking of penal action under Customs Act, 1962. Moreover, section 20 of the Foreign Trade (Development & Regulation) Act, 1992 provides that any proceeding under the erstwhile law could be instituted, continued or enforced and any penalty, confiscation or punishment may be imposed or made, after the repeal of the latter Act, as if the latter Act had not been repealed.

Apart from taking the Bench through the entire scheme of import and the alleged conspiracy hatched by the noticees and the roles played by them and justifying the penalties imposed, the AR also relied on a plethora of case laws to submit that the Principle of Caveat Emptor shall apply and the buyer of the goods shall step into the shoes of the importer / seller for the purposes of penalty also .

The Bench inter alia observed thus -

++ The contractors for supply to M/s Philips India were firms/companies being controlled and operated by Shri JP Mody and Shri Suketu J Mody. M/s Philips India and S/Shri V Ramamru tham and K Basu of Philips India admitted to having discussed the procurement routes with Shri JP Mody and Shri Suketu J Mody and they placed purchase orders on entities that did not have a factory for manufacture of these goods; nor were they able to furnish any evidence of compliance with Central Excise formalities. There was no transfer of technology from M/s Diebold, USA or M/s Philips Holland/ Jarfalla to these purported manufacturers.

++ None of the appellants have denied the fact that M/s Hindustan Engineering Corporation or other entities were controlled and operated by the Modys.

++ The Export Import Policy of the time had restricted the import of these goods to actual users qualified to be issued with special import licence. Likewise, parts could be imported for manufacture under restricted conditions. Admittedly, the imports were effected without such a licence entailing liability to confiscation of goods under section 111 of Customs Act, 1962.

++ With that, penalties under section 112 of Customs Act, 1962 would have to be visited upon those who were concerned in any manner with the handling of goods that were liable for confiscation or had, in any way, dealt with such goods.

++ There is nothing on record to demonstrate that M/s Hongkong & Shanghai Banking Corporation Ltd were eligible to procure 'automated teller machines'; at the same time, their global policy envisaged such a facility for their customers. The sole alternative was to procure them from local manufacturers. In the narrated circumstances of the restricted import and operational regime, nothing has been adduced by them to establish that they were unaware of the source of the goods that were ultimately to be installed in their premises and, hence, have them excluded from the purview of coverage under section 112 of Customs Act, 1962.

++ As far as M/s Philips India Ltd is concerned, they were the suppliers of the equipment to M/s Hongkong & Shanghai Banking Corporation purported to have been manufactured in India. They were not unaware of the exclusive source through which these products could have been vended. It is amply clear from the statements cited by Revenue as well as the correspondence referred to in the course of hearings that various options had been considered along with the constraints of the restricted industrial and import regimes that existed then. The subterfuge established in proceedings against the importer was conceived to overcome the imperatives of that regime and, having thus been connected to the impugned goods, M/s Philips India Ltd cannot be excluded from coverage under the penal provisions.

++ S/shri V Ramamritham, K Basu and AA Ansari were employees of their respective organisations. There is no evidence on record that they stood to benefit from the subterfuge other than by continuance of their source of livelihood. They must have advanced in years and the retention of this Damocles sword over them does appear to be disproportionate to the benefit that they extracted from the impugned import. ... Nevertheless, they are not beneficiaries. We feel that the ends of justice would warrant the setting aside the penalties against them. The appeals of these individuals are allowed.

The appeals were disposed of.

(See 2018-TIOL-53-CESTAT-MUM)