RAISING DEMAND FOR MISUSE OF END-USE EXEMPTION A DEMANDING ISSUE!
RAISING DEMAND FOR MISUSE OF END-USE EXEMPTION A DEMANDING ISSUE!
By R Raghavendra Rao
HOW to demand Customs duty when any post-import condition is violated? If we take one such Notification, the most famous 64/88-Cus dated 1.3.88, it imposed a post-import obligation of giving free treatment to 40 per cent of the outdoor patients. How to demand duty when the importer does not satisfy the condition therein? Can the duty be demanded under Section 28? Well, the issue makes an interesting study. First, we have the answer in Board’s Circular 73/2000 dated 1.9.2000.
The said circular discusses the issue in detail and clarifies that:
“In number of cases the Department has invoked provisions of Section 28 of the Customs Act for realization of customs duty on the ground that the post-importation condition, as stipulated in Notification No. 64/88, had not been fulfilled. In many of the cases proviso to Section 28(1) were also invoked alleging suppression, mis-declaration etc. Sometimes the duties were demanded under Section 28 even for importation which had taken place more than five years before the issue of show cause notice. In many of the cases such demand notices were set aside by the appellate authorities holding that there was no justification for alleging suppression or mis-declaration and since the notice was not issued within normal time limit, the demand of duty was not sustainable.”
“References were made to Law Ministry. It has been opined that notification like No. 64/88-Cus., which put post-import conditions of continuing nature, every day of breach, starts a new limitation for the purpose of Section 28. Accordingly, the limitation for violation of post-import obligations would start from the last day of violation preceding initiation of proceedings. In the second reference, it was clarified by the Law Ministry that Section 28 appears to deal with cases where the duty was leviable at the point of import but was somehow not levied or short-levied, that it does not appear to cover cases where duty was not leviable at the time of import because of conditional exemption but became leviable subsequently by reasons of subsequent events”.
“Field formations are advised to issue show cause notices for demand of duty by invoking the provisions of Notification No. 64/88-Cus, without mentioning Section 28 of the Customs Act, 1962 wherever the normal period of limitation i.e. one year provided under Section 28 (1) (a) is over”.
“The instructions contained in this letter will apply mutatis mutandis to other exemption notifications also where post-import conditions as stipulated in the notification are not fulfilled”.
For the time being let us keep the Board’s Circular aside and go through the two clarifications given by the Ministry of law, enclosed to the above circular. If we examine the same, we find some interesting argument.
(1) Ministry of Law, Justice & Co. Affairs, Department of Legal Affairs
The objection is whether duty demand would be time bound. Section 28(1)(a) provides for a one year limitation where duty has not been levied or has been short levied or erroneously refunded. The Section appears to deal with cases where the duty was leviable at the point of import but was somehow not levied or short-levied. It does not appear to cover cases where duty was not leviable at the time of import because of conditional exemption but became leviable subsequently by reason of subsequent events. In the present case, the importer was entitled to exemption subject to meeting the continuing obligation. The duty liability would arise when that obligation is not satisfied. Hence, it appears possible to demand duty if the beneficiary hospitals are not meeting the obligation any more.
(2) Department of Legal Affairs
CBEC has raised a query as to whether a notice for demand can be issued for a period beyond five years in respect of duty exemption wrongly availed under Exemption Notification No. 64/88.
In Mediwell Hospital case ( 2002-Taxindiaonline-69-SC-Cus ), the Supreme Court classified the conditions into pre-conditions and post-conditions. The Apex Court further held that the very notification granting exemption must be construed to cast continuing obligation on the part of all those who have obtained the certificate from the authority and on the basis of that to have imported equipments of customs duty to give free treatment at least to 40% of the out-door patients as well as would give free treatment to all the indoor patients belonging to the families within income less than Rs. 500 per month.
From the above background it appears that the above cases dealt with the duty liability because of non-compliance of post-importation conditions which are not only in para 4(b) of the Table but in para 2 of the Table as well. Since the post-importation conditions are continuing obligations, it appears that everyday of breach starts a new limitation for the purpose of section 28.
Now, as per the clarification at Sl No 1 above, the situation is not covered under Section 28 as it is not a case where the duty was short levied or not levied at the time of import. But as per Sl No 2, Section 28 is not altogether ruled out because “it appears that every day breach starts a new limitation for the purpose of Section 28”.
The issue is so complex that there is contradiction even within the clarification by Ministry of Law! If Section 28 is not applicable for such demands as clarified at point No 1, then where is the question of any limitation for the purpose of Section 28 in Point No 2?
Interestingly the Board’s Circular also does not clear the confusion. It says “Filed formations are advised to issue show cause notices for demand of duty by invoking the provisions of Notification No. 64/88-Cus, without mentioning Section 28 of the Customs Act, 1962 wherever the normal period of limitation i.e. one year provided under Section 28 (1) (a) is over.
Does this mean, if the normal period is not over, can the demand be made under Section 28(1)(a)? If the provisions of Section 28 are not applicable as clarified by MOL in point no 1, then how demand can be made for normal period under the same Section?
Now let us go through some of the decisions on this tricky issue:
Karnataka High Court in Medical relief society of south kanara Vs Union of India ( 2003-Taxindiaonline-35-HC-KAR-CUS ).
“Failure to discharge that obligation was liable to expose the equipment to confiscation besides entitling the respondent to recover the amount of duty payable on the same. Proceedings for recovery of the exempted customs duty or the confiscation of the equipment in the above circumstances does not fall foul of Section 28”.
In yet another case, Lady Amphthil Nurses Instns. Vs Commissioner of Cus., Chennai ( 2002-Taxindiaonline-43-Cestat-Del-LB ), it was held :
56. Thus infringement could be only prospective from the date of clearance of the goods. Since it was a post-importation obligation, therefore, liability to pay duty or confiscation of the goods could arise only subsequent to the date of clearance of the goods. In the absence of any specific period, the liability could arise only when there is infringement of the condition and hence Section 28 did not apply.
Interestingly in para 39 and 40 of the above decision, the ratio of Karnataka High Court was followed as under:
40. It would thus be clear that the above decision of the High Court decides that (a) Customs can start recovery proceeds, (b) Recovery will be of the amount which was exempted, (c) equipment can be confiscated, and (d) proceedings of recovery do not fall foul of Section 28 of the Customs Act, 1962.
A combined reading of para 39,40 and 56 of the above larger bench decision gives an impression that only limitation under Section 28 is not applicable, but the case would not fall foul of Section 28 .
Finally after going through the Board’s Circular, opinion by the Ministry of law and the above case law, I am confused as to:
+ Whether any demand of customs duty can be made under the Customs Act without mentioning Section 28?
+ If the duty has to be demanded in terms of the Notification, what is the time limit?
+ When Section 28 is not applicable, and duty has to demanded only in terms of the Notification, where is the question of every day breach and limitation for the purpose of Section 28
Fortunately I got answers to all above. Not from the Board’s Circular, not from the opinion of Ministry of law not from Section 28, but from a decision of Hon’ble Supreme Court.
Supreme Court in case of Jagdish Cancer Research Centre Vs Commissioner of Customs ( 2002-Taxindiaonline-119-SC-CUS ) held:
A reading of sub-sections (1) and (2) of Section 125 together makes it clear that liability to pay duty arises under sub-section (2) in addition to the fine under sub-section (1). Therefore, where an order is passed for payment of customs duty along with an order of imposition of fine in lieu of confiscation of goods, it shall only be referable to sub-section (2) of Section 125 of the Customs Act. It would not attract Section 28(1) of the Customs Act which covers the cases of duty not levied, short levied or erroneously refunded etc.
So, when any duty has to be recovered for violation of post-import condition, one has to issue show cause notice under Section 124 of the Customs Act proposing confiscation of the goods invoking Section 111(o) and order for payment of duty in addition to fine under sub section (2) of Section 125. Hence it is requested that suitable fresh clarification may be issued in this regard.
(The author is Superintendent of Central Excise and the veiws expressed are personal. The author can be mailed at firstname.lastname@example.org )