By TIOL News Service

NEW DELHI, NOV 29, 2018: THIS is a Revenue appeal filed against the order dated 01.09.2017 -   2017-TIOL-3750-CESTAT-DEL passed by the CESTAT.

During the period 2006-09, the assessee used to export its goods, namely pan masala and gutkha under the DFIA licence.

ASCN was issued alleging that the assessee had contravened the provisions of Paragraph 4.55.3 of the Handbook of Procedure of Import and Export (HBP) and the exemption notification No. 40/2006-Cus.

It is pertinent to note that DFIA scheme came into force on 01.05.2006, which is also the date on which the exemption notification was issued.

According to the Revenue, the effect of the HBP and the exemption notification was that the assesse had to mention the technical characteristics, quality and specifications of the perfumes/essential oils/ aromatic chemicals used by it in its shipping bills.

The assessee resisted the show cause notice and contested the proceedings.

The Commissioner of Customs (Exports) considered the exports made by the assessee at New Delhi and Kanpur and imposed, in sum, fines of Rs.18,00,000/- (in lieu of confiscation) and penalty of Rs. 8,00,000/- u/s 114 of the Customs Act, 1962.

The assessee's appeal before the Tribunal succeeded on an interpretation of paragraph 4.55.3 of the HBP and the exemption notification, holding that the requirement was that the technical specifications of the resultant product, and not the inputs , are required to be mentioned in the shipping documents.

The notification 40/2006-Cus exempts materials imported into India under DFIA Licenses from customs duty, additional duty, safeguard duty and anti-dumping duty, subject to various conditions. The first condition reads -

(i) That the description, value and quantity of materials imported are covered by the said authorization and the said authorization is produced before the proper officer of customs at the time of clearance for debit:

Provided that in respect of resultant product specified in paragraph 4.55.3 of the Handbook of Procedure (Vol.I) of the Foreign Trade Policy, the materials permitted in the said authorization or a duty free import authorization for intermediate supply, as the case may be, shall be of the same quality, technical characteristics and specifications as the materials used in the said resultant product.

Provided further that in respect of the said resultant product the exporter shall give declaration with regard to the quality, technical characteristic and specifications of materials used in the shipping bill."

Clause 4.55.3 of the HBP is reproduced below:-

"However in respect of the following items, the exporter shall be required to give declaration with regard to technical characteristics, quality and specification in the shipping bill. The regional authority while issuing DFIA shall mention the technical characteristics, quality and specification in respect of such inputs.

Alloys steel including stainless steel, copper alloys, synthetic rubber, bearings, solvent, perfumes/essential oil, aromatic chemicals, surfactants, relevant fabrics, marble, articles made of poly-propylene, articles made of paper and paper board, insecticides, lead ingots, zinc ingots, citric acid, relevant glass fibre reinforcement (glass fibre, chopped/stranded mat, roving woven surfacing mat), relevant synthetic resin (unsaturated polyster resin, epoxy resin, vinyl ester resin, hydroxyl/ethyl cellulose), Lining Material."

As mentioned, Revenue is aggrieved by the order of the CESTAT and is in appeal before the Delhi High Court.

The counsel for the revenue submitted that a reading of the exemption notification and paragraph 4.55.3 of the HBP makes it clear that these declarations are required if the inputs imported under the DFIA License are enumerated in paragraph 4.55.3. Applying this to the present case, the revenue argues that the assessee was duty bound to make the requisite declarations on the shipping bills, as its inputs perfumes/essential oils, aromatic chemicals are listed in paragraph 4.55.3.

The assessee emphasized upon the use of the words "resultant product" in the exemption notification and contended that the declaration was required only if the items produced by using the imported inputs are listed in paragraph 4.55.3. Inasmuch as since the Respondent's products (pan masala, guthka) not having been included in that list, the Respondent's case is that no such declaration was required.

The High Court considered the submissions and while noting that the arguments by the revenue merit acceptance inter alia observed –

++ The DFIA scheme was intended to permit duty free import of inputs used in the manufacture of exported goods. The licenses issued by the DGFT thereunder are subject to the conditions stipulated in the HBP. Insofar as the license is in respect of the products specified in paragraph 4.55.3 thereof, the licensee is required to furnish a declaration with regard to the technical characteristics, quality and specification in the shipping bill.

++ The exemption was evidently granted to operationalize the benefits accruing under the DFIA scheme. The condition contained in paragraph (i) of the exemption notification must, therefore, be read harmoniously with the provision of the HBP to which it expressly refers. Such an interpretation leads to the conclusion that the "resultant product" mentioned in the two provisos to paragraph (i), refers to the goods produced using the inputs imported under the DFIA.

++ The rival interpretation advanced by the assessee (and accepted by the Tribunal) is that the declaration requirement of the exemption notification is applicable only if the exported goods are included in the list of items enumerated in paragraph 4.55.3. This contention cannot be accepted.

++ The consequence of the assessee's interpretation would render it impossible to correlate the duty-free imports made under the DFIA, with the inputs used in the exported products. Further, if the "resultant products" are those enumerated in paragraph 4.55.3, then this interpretation would require a declaration of the quality, technical characteristics and specification of the materials used in those items. Such a construction, in this court's opinion, is unreasonable as the DFIA is intended to exempt inputs used in production of other goods in India, and is not concerned with the materials that have been used in the production of those inputs.

The questions of law framed were answered in the affirmative i.e. in favour of the revenue and against the assessee.

Nonetheless, the assessee pointed out that certain other issues had also been raised before the Tribunal, including, particularly the question of limitation which has not been decided in the impugned order and, therefore, in the event the CESTAT's order is set aside, the appeal may be remanded to the tribunal.

The High Court agreed.

Conclusion: The appeal of Revenue was allowed and the matter was remanded to the Tribunal.

(See 2018-TIOL-2475-HC-DEL-CUS)