By TIOL News Service

AHMEDABAD, JAN 24, 2019: THE appeal filed against the CESTAT order was admitted on the following substantial questions of law -

(1) Whether all the raw materials, including those rendered as wastage during manufacture of exported goods, were not exempt under Notification No.13/81 Custom dated 9.2.1981?

(2) Whether demand of Customs duty on imported raw materials contained in wastage in excess of input-output norms under the Export Import Policy was legally correct?

(3) Whether the final order of the Appellate Tribunal confirming demand of duty with penalty on wastage of imported fabrics was legally correct and sustainable?"

The appellant is a 100% Export Oriented Undertaking and procured nine consignments of fabrics for manufacture of trousers during the period from 25.12.1994 to 24.12.1996. It is the case of the appellant that these fabrics have been used in relation to manufacturing trousers which have been exported by the appellant thereby fulfilling the export obligations; that the waste was disposed of after due permission was obtained from the Deputy Commissioner, Central Excise.

The appellant maintained records of the above fabrics procured duty free, consumption of these fabrics in relation to manufacture of trousers and export of trousers as well as waste in the form of trimmings and cuttings that arose.

On the basis of such reports, the excise authorities found that the total quantity of fabrics consumed for each trouser was 1.984 square metres per trouser on average basis.

However, the input output norm for trousers under the Handbook of Procedures has been prescribed as 1.687 square metres per trouser.

On this basis, the CCE& Cus issued a SCN suggesting that there was excess consumption of fabrics to the tune of 32185.06 square metres and, accordingly, suggested that duties to the tune of Rs.17,44,818/- were required to be recovered on excess consumption of fabrics with penalty and interest under the provisions of the Customs Act.

The allegation that the appellant had contravened the provisions of Notification No.13/81-Cus read with Exim Policy norms for trousers was upheld and accordingly, duty demand of Rs.17,44,818/- came to be confirmed with penalty of Rs.35,00,000/- and interest.

In appeal, the CESTAT upheld the order but reduced the penalty to Rs.8 lakhs.

The assessee is before the Gujarat High Court and urged that the demand be set aside.

After considering the submissions made, the High Court inter alia observed that the moot question that arises for consideration is whether, based on the standard input output norms (SION) fixed under the Exim Policy, the appellant can be called upon to pay customs duty in respect of the excess fabric consumed by it.

Extracting the notification 13/81-Cus, the High Court viewed -

+ The department has nowhere alleged that the duty free imported goods were not consumed in the manufacturing of the finished goods or that such goods have been cleared in the guise of removal of waste.

+ Once it is not disputed that the goods were used in the manufacturing of finished goods and the export obligation has been duly fulfilled, the benefit of exemption provided under the notification in question cannot be denied to the appellant.

+ Notification No.13-Cus dated 9.2.1981 does not lay down any criteria for waste nor does the same provide any conditions regarding extent of wastage allowed.

+ There is nothing (in the notification) to indicate that raw material imported and contained in such waste in excess of norms shall be rendered ineligible for the benefit of such notification.

+ Notification No.13-Cus is primarily concerned with fulfillment of export obligation from the goods imported into India and the satisfaction required to be recorded by the Assistant Collector as contemplated by Condition (6) is not in the context of wastage generated, but in the context of manufacture of articles for export from the imported goods.

+ In the present case, it is not the case of the respondent that any part of the imported fabric has been diverted or clandestinely removed. The only allegation is that the waste generated is more than the standard input output norm, which has nothing to do with the fulfillment of export obligation or compliance with the conditions of the exemption notification.

+ Under the circumstances, the raw material being exempted under Notification No.13/81-Customs dated 09.02.1981, the demand of customs duty on imported raw materials contained in wastage in excess of input-output norms is not justified.

+ In the opinion of this court, disposal of waste as provided under paragraph 190 [of Chapter IX of the New Import Export Policy & Procedures, 1992-97] in respect of which standard input output norms have to be followed; and use of imported raw material for fulfillment of export obligation under the exemption notification; are entirely different things.

+ The controversy that has arisen in the present case is on account of wrongly applying norms for disposal of waste while considering whether the conditions stipulated under the exemption notification have been satisfied.

+ Thus, despite the fact that excess consumption has been found as compared to the standard input output norms, such excess waste has been permitted to be destroyed by the Deputy Commissioner, Central Excise & Customs, and hence, the respondent is not justified in demanding customs duty forgone on the excess waste material worked out on the basis of the input-output norms.

+ Condition No.6 of the Notification No.13-Customs dated 9.2.1981 cannot be read in a manner whereby despite the fact that the assessee is in a position to show that the entire material has been used for the purpose of manufacture of goods and there is no allegation with regard to diversion of goods, merely because the wastage norms are not satisfied, the Assistant Collector of Customs can record satisfaction to the effect that the goods have not been used for the manufacture of articles for export.

Concluding that the Appellate Tribunal was not justified in confirming the customs duty on imported raw materials contained in wastage in excess of input output norms under the Export Import policy, the impugned order was quashed and set aside.

The assessee appeal was allowed.

(See 2019-TIOL-207-HC-AHM-CUS)