Demand of concession availed vide customs notification sustained for failure to maintain proper records

Salzer Electronics Ltd. (Unit III) Vs Commissioner of GST and Central Excise (CESTAT Chennai)

CESTAT Chennai upholds the demand of concession availed vide customs notification on failure of appellant to maintain proper accountal of the receipt of imported goods till their utilization in the manufacture of the specified finished products.

Facts- This appeal is preferred by M/s. Salzer Electronics Ltd., against Order-in-Appeal of the Commissioner of Customs and Central Excise (Appeals), Trichy rejecting the appellant’s appeal.

The Additional Commissioner of Customs, Coimbatore has ordered for recovery of Rs.36,94,921/- being an amount equal to the difference between the duty leviable on the goods imported and the concessional rate of duty availed in terms of Notification No. 25/99-Cus dated 28.02.1999 in terms of Rule 8 of Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 (Customs Rules, 1996) read with Section 28 (5) of Customs Act, 1962 along with interest.

Notably, the appellant imported parts of Relays, Switches and Connectors availing the benefit of concessional rate of duty as per Notification No. 25/99-Cus dated 28.02.1999.

Conclusion- Held that the appellant has not maintained the records as required in the Customs Rules, 1996 for proper accountal of the receipt of imported goods till their utilization in the manufacture of the specified finished products. So, we have to uphold the demand raised in terms of Rule 8 of the Customs Rules, 1996 which is the amount of concession availed under Notification No. 21/2002-Cus. dated 01.03.2002.

Tribunal in the case of Shiv Kripa Ispat Pvt. Ltd. Vs. Commissioner of Central Excise and Customs held that the goods cannot be confiscated and the redemption fine not to be imposed when they are not available for confiscation.

FULL TEXT OF THE CESTAT CHENNAI ORDER

This appeal is preferred by M/s. Salzer Electronics Limited, Unit III whose address is at SF No. 671/1, No. 2, Gudular Village, Samichettipalayam, Coimbatore against the Order-in-Appeal No. 316/2013 dated 20.09.2013 of the Commissioner of Customs and Central Excise (Appeals), Trichy rejecting the appellant’s appeal filed against the Order-in-Original No. 01/2013-ADC dated 21.03.2013.

2. The Additional Commissioner of Customs, Coimbatore vide order dated 21.03.2013 has ordered for recovery of Rs.36,94,921/- being an amount equal to the difference between the duty leviable on the goods imported and the concessional rate of duty availed in terms of Notification No. 25/99-Cus dated 28.02.1999 in terms of Rule 8 of Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 (herein after this Rules will be called as Customs Rules, 1996) read with Section 28 (5) of Customs Act, 1962 along with interest.

3.1 Brief facts of the appeal are that the appellant is engaged in the manufacture of Modular Switches and Parts falling under Central Excise Tariff Heading No. 85369090 and 85389000 of the Central Excise Tariff Act. The appellant imported parts of Relays, Switches and Connectors availing the benefit of concessional rate of duty as per Notification No. 25/99-Cus dated 28.02.1999. In order to avail the above concession, the importer/manufacturer has to comply with the provisions of Customs Rules, 1996. Accordingly, the appellant obtained Registration Certificate dated 27.05.2004 as per Rule 3 of the Customs Rules, 1996 which was effective upto 22.09.2011. The appellant has also executed a bond as required under the Customs Rules, 1996 and filed periodical returns under E.R. 1 with the Department. The imported materials were received in the factory of the appellant and various processes required for the manufacture of modular switch assembly were carried out which were cleared to appellant’s unit at Una for carrying out full assembly operations before the final product i.e, Modular Switches were cleared from the unit at Una. During the disputed period, the appellant’s unit at Una received the sub-assemblies and parts of Modular Swithches only from the appellant’s unit at Coimbatore.

3.2 During the audit of the accounts of M/s. Salzer Electronics Limited at Coimbatore, it was noticed that the appellant was clearing parts of switches from their unit at Samichettipalayam to their unit at Una, Himachal Pradesh. It was also observed that the said parts of switches were imported under Customs Notification No. 25/99-Cus (Entry No. 112 of list A) which prescribes concessional rate of Customs duty which were used in the manufacture of finished goods.

3.3 It was also observed that more than 90% of the inputs required for the manufacture of Switches have been imported by the appellant from China. Some of the imported goods were cleared to their unit at Una and parts of Switches also have been sold from their unit at Una, Himachal Pradesh. The appellant as required under Rule 4(2) of the Customs Rules, 1996 has executed a bond with an undertaking that the imported goods shall be used for the manufacture of Switches, Relays and Connectors. The said bond executed specifies the manufacturer’s factory for utilization of the imported goods. So, it was alleged that the appellant have contravened the end-use condition of the beneficial Notification by removing the parts and accessories of imported Switches to their unit at Una and also by selling parts of imported Switches thereby becoming in-eligible to avail the benefit of the said Notification due to violation of the end-use condition and the imported goods became liable for confiscation under Section 111(O) of the Customs Act, 1962. Consequently, investigation carried out also revealed that the appellant failed to maintain proper accounts to reflect the quantity of imported inputs used in the manufacture of Switches and parts of Switches contravening the Rule 7 of the Customs Rules, 1996 for non-observance of the conditions of the Notification and Customs Rules, 1996 in respect of permission granted. A Show Cause Notice came to be issued to the appellant which was resulted in demand of duty along with interest, confiscation of goods and imposition of fine and penalty as mentioned in paragraph 2 above.

4.1 The Ld. Advocate Shri T. Ramesh has submitted that the appellant has complied with all the conditions of Notification No. 25/99-Cus dated 28.02.1999 read with the Customs Rules, 1996 and there was no dispute regarding receipt of the imported goods in their factory premises, and required manufacturing activities were carried out for manufacture of final product Switches and Modular Plates. He has submitted that all the manufactured sub-assemblies/parts of switches in SKD/CKD condition from Samichettypalayam unit at Coimbatore were cleared on payment of Central Excise duty to their unit at Una, Himachal Pradesh. Their factory at Una has received only such assemblies/sub-assemblies from their factory at Coimbatore and no other parts/sub-assemblies were received from outsiders during the entire disputed period. These parts and sub-assemblies were assembled and final product switches were packed and cleared to the customers from their unit at Una thus, complied with all the conditions of the Notification read with the Customs Rules, 1996.

4.2 The Ld. counsel has argued that as per the Rule 3 of the Customs Rules, 1996, the appellant is permitted to manufacture the parts of Switches/Modular Plates out of the imported material in their factory at Coimbatore. As the condition in the Customs Rules, 1996 is the receipt and use of the imported materials in their factory for the manufacture of the goods specified in the Registration Certificate issued under Rule 3 of the Customs Rules, 1996, the benefit of the Notification No. 25/99 dated 28.02.1999 cannot be denied in as much as the Una unit belonged to the appellant and common balance sheet and other financial records are maintained for all the units belonging to the appellant. A scrutiny of the entries in the balance sheet and the financial accounts would clearly indicate that the unit at Una has exclusively purchased the parts of Switches and sub-assemblies from the unit at Coimbatore and so the benefit of the Notification cannot be denied as the imported materials were used by the importer manufacturer himself and there was no diversion.

4.3 The Ld. Advocate has also further submitted that the substantive condition of the Notification read with Customs Rules, 1996 is that the imported materials have to be used for intended purpose of manufacture of the declared goods has been achieved. Neither the Notification nor the Customs Rules, 1996 contemplates the use of imported materials in the declared premises only and there is no bar to carry out the process of manufacture or completion of manufacturing process in another unit of their factory.

4.4 In support of his contentions, the appellant has relied upon the following decisions:-

i) Finolex Cables vs. Commissioner of Customs & Central Excise, Goa [2017 (358) ELT 990 (Tri. Mumbai)]

ii) Tamil Trading Corporation vs. Commissioner of Central Excise, Tuticorin [2006 (198) ELT 539(Tri. Chennai)]

iii) Commissioner of Central Excise Bangalore-I vs. Electronic Research [2005 (187) ELT 495 (Tri. Bang.)]

iv) FCD Ltd. vs. Commissioner of Central Excise, Belapur [2017 (357) ELT 464 (Tri. Mumbai)]

4.5 The Ld. Advocate for the appellant has contended that the demand raised under Rule 8 of the Customs Rules, 1996 is not sustainable as the recovery of Customs duty for short payment and non-payment can be made only under Section 28 of the Customs Act, 1962.

4.6 It has been put forth that the period involved is from 2005-06 to 2010-11 (upto 01.11.2010) whereas the Show Cause Notice was issued on 14.07.2011 only. It is argued that the Show Cause Notice has not been issued under Section 28 of the Customs Act, 1962 and extended period has not been invoked. There is no suppression with an intent to evade payment of duty and the appellant has complied with all the conditions of the Notification No. 25/99-Cus dated 28.02.1999. The Department had full knowledge of the activities of the appellant and the goods cleared from one unit of the appellant to other unit at Himachal Pradesh was on payment on Central Excise duty. The appellant has filed periodically statutory returns declaring the use of imported materials for the manufacture and clearance of parts/sub-assemblies in SKD/CKD condition to their unit at Una and so the demand is barred by limitation for the period prior to 14.07.2010 as there is no suppression involved.

5. The Authorised Representative Shri R. Raja Raman supported the findings of the lower appellate authority. He has submitted that the imported goods were not used for the manufacture of finished goods i.e, Switches as mandated in the Notification No. 25/99-Cus dated 28.02.1999, so, the appellant is not eligible for the benefit of the concessional rate of duty and the demand confirmed and fine and penalty imposed are legal and so to be upheld. He has prayed for setting aside the appeal.

6. We have heard both sides and we have considered the submissions and evidences as available from the appellate records.

7. The main issues that have to be decided in this appeal are

(i) Whether the appellant is eligible for the benefit of concessional rate of duty under Notification No. 25/99-Cus dated 28.02.1999 when a part of manufacturing activity was undertaken in a premises/factory not declared in the Registration Certificate obtained under the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996?

(ii) Whether the imported goods and their resultant products are liable for confiscation for non-compliance to the condition of the Notification ibid read with the Customs Rules, 1996?

(iii) And whether the fine and penalty are rightly imposed on the appellant in the facts and circumstances of this case?

8.1  In order to avail either the exemption or concessional rate of duty benefit under Notification No. 25/99-Cus dated 28.02.1999, any importer manufacturer is required to comply with the provisions of Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996. Accordingly, the appellant has obtained the Registration Certificate from the Assistant Commissioner of Central Excise, Coimbatore indicating therein that the excisable goods that are to be manufactured from the imported goods as ‘Switches (Modular/Plates) parts thereof’. In the Annexure to the said Registration Certificate, the appellant has indicated the details of various imported goods i.e, description of the item along with Customs Chapter Sub-Heading to be used in the manufacture of Switches. As required, the appellant has executed a bond without any security for an amount of Rs. 50,00,000/- for the purpose of import of goods at concessional rate of duty for manufacture of excisable goods. In the Registration Certificate, the importer manufacturer’s address was given as M/s. Salzer Electronics Ltd. Unit-III, Samichettipalayam, Coimbatore – 641 047. The Notification No. 25/99-Cus dated 28.02.1999 allows concessional rate of duty for import of parts of Relays, Switches and Connectors to be used for manufacture of Relays, Switches and Connectors. The appellant in this Case has manufactured not complete Relays/Switches/Connectors but parts of these products which were admittedly cleared entirely to their unit at Una, Himachal Pradesh.

8.2 The contention of the Revenue is that the appellant has contravened the provisions of the Notification read with the Customs Rules, 1996 by not manufacturing the Switches in the declared premises. As a result, in terms of Rules 8 of the Customs Rules, 1996, a demand was raised for recovery of concessional rate of duty availed by the appellant on imported goods. For ease of reference the relevant part of the Notification is extracted below: –

8.3 Rule 3 and 8 of the Customs (Import of Goods at Concessional Rate of Duty for Manufacture of Excisable Goods) Rules, 1996 reads as follows:-

“Rule 3. Registration. –

1. A manufacturer intending to avail of the benefit of an exemption notification referred to in sub-rule (1) of rule 2, shall obtain a registration from the Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise having jurisdiction over his factory.

2. The registration shall contain particulars about the name and address of the manufacturer, the excisable goods produced in his factory, the nature and description of imported goods used in the manufacture of such goods.

3. The Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise shall issue a certificate to the manufacturer indicating the particulars referred to in sub-rule (2).

Rule 8. Recovery of duty in certain case. –

The [Assistant Commissioner of Central Excise or Deputy Commissioner of Central Excise] shall ensure that the goods imported are used by the manufacturer for the intended purpose [or are re-exported in terms of Rule 7A] and in case they are not so used take action to recover [the amount equal to the difference between the duty leviable on such goods but for the exemption and that already paid, if any, at the time of importation, along with interest, at the rate fixed by notification issued under Section 28AB of the Customs Act, 1962, for the period starting from the date of importation of the goods on which the exemption was availed and ending with the date of actual payment of the entire amount of the difference of duty that he is liable to pay.]”

8.4 No dispute is there and it is an admitted fact that the appellant has not manufactured Switches in their Coimbatore unit, but, only parts of Switches / sub-assemblies / components which were entirely cleared to their unit at Una, Himachal Pradesh on payment of applicable Central Excise duties. A perusal of the records will clearly indicate that the appellant has not intimated the jurisdictional Central Excise and Customs authorities in Coimbatore regarding clearance of parts of Switches to Una unit till the time of the audit of unit took place. The Registration Certificate obtained under Customs Rules, 1996 indicate that the appellant has declared only the factory premises at Samichettipalayam, Coimbatore as a manufacturing premises. The Notification No. 21/2002-Cus. dated 01.03.2002 allows the benefit of concessional rate of duty only if the imported goods are used for the manufacture of Switches, Relays and Connectors. Whereas the manufacture of Switches not done in the Coimbatore unit but only the parts and sub-assembly of Switches.

8.5 An elaborate procedure is prescribed in the Customs Rules, 1996 for availing either exemption or concessional rate of duty in order to ensure that the imported goods are used in manufacture of specified goods and duly accounted for. These Rules are framed so that the jurisdictional authority could monitor the utilization of the goods imported at concessional rate of duty. The appellant by not intimating the Department regarding clearance of not the final products as envisaged in the Notification but by clearing only parts of Switches to their another unit located in another state, has contravened the provisions of the said Notification and the Customs Rules, 1996. The decisions of the lower adjudicating authorities could not be found fault with when they upheld that imported goods had not been used for the intended purpose. We refer to the decision of the Apex Court in the case Mihir Textiles Ltd. Vs. Commissioner of Customs, Bombay [1997 (92) ELT 9 (SC)], wherein it was held that when concessional relief of duty is made dependent of satisfaction of certain conditions, the relief cannot be granted in the absence of satisfaction of the conditions even if the conditions are only directory.

9.1 We find some merit in the contention that semi-finished products i.e., parts of Switches /sub- assemblies manufactured from the imported goods are entirely cleared to their unit at Una, Himachal Pradesh as evidenced by various documents, invoices produced. But, their contention that there is no bar to carry out the process of manufacture in another unit of their own factory as the substantive condition of the Notification read with the Customs Rules, 1996 was fully complied with and the benefit of Notification cannot be denied on the ground that the imported goods were not utilized for the specified goods as the end use condition stands complied with is not convincing. Any Notification has to be interpreted strictly and the benefit of the Notification is not extendable when the conditions are not complied with. In the case of Commissioner of Central Excise, New Delhi Vs. Hari Chand Shri Gopal [2010 (260) ELT 3 (SC)], the Hon’ble Apex Court has held that in respect of exemption notification, the conditions of the notification have to be complied with if exemption is available on compliance with conditions. The mandatory requirement of such requirement must be obeyed or fulfilled exactly. The relevant portion of the judgment is extracted below:-

“22. The law is well settled that a person who claims exemption or concession has to establish that he is entitled to that exemption or concession. A provision providing for an exemption, concession or exception, as the case may be, has to be construed strictly with certain exceptions depending upon the settings on which the provision has been placed in the Statute and the object and purpose to be achieved. If exemption is available on complying with certain conditions, the conditions have to be complied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, though at times, some latitude can be shown, if there is a failure to comply with some requirements which are directory in nature, the non-compliance of which would not affect the essence or substance of the notification granting exemption. In Novopan Indian Ltd. (supra), this Court held that a person, invoking an exception or exemption provisions, to relieve him of tax liability must establish clearly that he is covered by the said provisions and, in case of doubt or ambiguity, the benefit of it must go to the State. A Constitution Bench of this Court in Hansraj Gordhandas v. H.H. Dave – (1996) 2 SCR 253, held that such a notification has to be interpreted in the light of the words employed by it and not on any other basis. This was so held in the context of the principle that in a taxing statute, there is no room for any intendment, that regard must be had to the clear meaning of the words and that the matter should be governed wholly by the language of the notification, i.e., by the plain terms of the exemption.”

9.2  Further, the Hon’ble Supreme Court in the case of Commissioner of Customs (Import), Mumbai Vs. Dilip Kumar & Company [2018 (361) ELT 577 (SC)] has also held that the words in a statute when clear, plain and unambiguous and only one meaning can be inferred, Courts bound to give effect to the said meaning irrespective of consequences. In applying the rule of plain meaning any hardship and inconvenience cannot be the basis to alter the meaning to the language employed by the legislation especially in fiscal statutes. The relevant paragraph is extracted below:-

“19. The well-settled principle is that when the words in a statute are clear, plain and unambiguous and only one meaning can be inferred, the Courts are bound to give effect to the said meaning irrespective of consequences. If the words in the statute are plain and unambiguous, it becomes necessary to expound those words in their natural and ordinary sense. The words used declare the intention of the Legislature. In Kanai Lal Sur v. Paramnidhi Sadhukhan, AIR 1957 SC 907, it was held that if the words used are capable of one construction only then it would not be open to the Courts to adopt any other hypothetical construction on the ground that such construction is more consistent with the alleged object and policy of the Act.”

For non-compliance/non-fulfillment of the condition of the Notification ibid, natural consequences will follow.

10.1 We find that Ld. Advocate’s reliance on the decisions rendered in the cases of Finolex Cables vs. Commissioner of Customs & Central Excise, Goa [2017 (358) ELT 990 (Tri. Mumbai)], Tamil Trading Corporation vs. Commissioner of Central Excise, Tuticorin [2006 (198) ELT 539 (Tri. Chennai)], Commissioner of Central Excise Bangalore-I vs. Electronic Research Ltd. [2005 (187) ELT 495 (Tri. Bang.)] and FCD Ltd. vs. Commissioner of Central Excise, Belapur [2017 (357) ELT 464 (Tri. Mumbai)] do not squarely cover the issue in dispute and the facts in those cases are distinguishable from those of obtaining in this appeal.

10.2 In the case of Finolex Cables supra, the issue was whether the imported Copper Cathodes to be converted into wire rods before being used in the manufacture of ‘jelly filled telephone cables’ whether were eligible for the benefit of the relevant Notification as the importer manufacturer did not have the facility to convert copper cathodes into wire rods and this process of conversion was out sourced. Whereas in the instant case, the manufacture of the finished goods has not taken place in the factory specified in the Registration Certificate obtained in terms of the Customs Rules, 1996. The issue involved in this dispute is whether semi-finished goods which were cleared and used in the manufacture of the specified finished goods in another manufacturing unit of the appellant can be extended the concessional duty benefit of the Notification ibid.

10.3 Whereas in the case of Tamil Trading Corporation supra, the issued involved was interpretation of the expression ‘his factory’ and it was held that the importer need not be the owner of the factory for availing the benefit of the notification prescribing the end use as a condition.

10.4 In the case of Electronic Research Ltd. supra, the goods imported with duty concession for use at one factory were transferred to another unregistered factory located at another place after informing the jurisdictional officers. Whereas in this case, such an intimation has not been made. The appellant must be aware of the fact that complete switches are not scheduled to be made in their Coimbatore factory. During the entire period of dispute, complete switches are never made and only parts/sub-assemblies were made and transferred to their unit at Una, Himachal Pradesh for completing the final process or for manufacture of the Switches. No reasons are given for not informing the jurisdictional Central Excise and Customs authorities concerned.

10.5 In the case of FDC Ltd. supra, the imported goods were sent to the job worker and the ownership of the goods remained with the appellant right from import of goods till their utilization in the manufacture of the final product and it is held that end use condition was satisfied. Whereas in this case, semi-finished parts were cleared to their unit at Una, Himachal Pradesh on payment of duty, both the units have functioned independently.

11.1 For the above reasons, we do not find any merit in the appellant’s contentions that they have complied with the conditions of the Notification read with the Customs Rules, 1996. Further, we take note of the lower original authority’s observation that the appellant’s unit at Una, Himachal Pradesh have sold parts of switches as could be seen from the sale invoices given as Annexure B2 to the Order-in-Original No. 01/2013-ADC dated 21.03.2013. One of the sample invoices extracted below has evidenced that imported parts or semi-finished goods have been sold and cleared from their unit at Una, Himachal Pradesh.

11.2 More than ten sample invoices were mentioned as an evidence of clearance of parts or sub-assemblies, etc., rather than the switches which were the specified finished product. Some of the imported goods were also cleared to UNA unit and from there to their customers without carrying out any manufacturing activity.

11.3 We also have to observe that the jurisdictional Central Excise and Customs officers at Coimbatore cannot monitor the receipt and utilization of the imported materials at concessional rate of duty under Notification No. 21/2002-Cus. dated 01.03.2002. We also note that the appellant has not maintained the records as required in the Customs Rules, 1996 for proper accountal of the receipt of imported goods till their utilization in the manufacture of the specified finished products. So, we have to uphold the demand raised in terms of Rule 8 of the Customs Rules, 1996 which is the amount of concession availed under Notification No. 21/2002-Cus. dated 01.03.2002.

12. On consideration of the appellant’s contentions that all the components/sub-assemblies/parts of Switches were cleared to their unit at Una, Himachal Pradesh where these were reportedly utilized for the manufacture of the Switches and that too when the goods are not available for confiscation adopting a liberal approach and relying on the decision rendered by the Tribunal in the case of Shiv Kripa Ispat Pvt. Ltd. Vs. Commissioner of Central Excise and Customs, Nasik [2009 (235) ELT 623 (Tri.-LB)] wherein it was held that the goods cannot be confiscated and the redemption fine not to be imposed when they are not available for confiscation, we order to set aside the confiscation and consequently, the fine imposed.

13. However, imposition of penalty under Section 112 (a)(ii) of the Customs Act, 1962 for contravening the provisions of the Notification No. 21/2002-Cus. dated 01.03.2002 read with the Customs Rules, 1966 is justified but the same is reduced to Rs.3,60,000/- (Three Lakhs Sixty Thousand only).

14. Thus, the appeal is partly allowed on the above terms.

(Order pronounced in open court on 31.08.2023)