Duty exemption available as there is no transfer in violation of actual user condition

Commissioner of Customs Vs Galaxy Surfactants Ltd (Bombay High Court)

Bombay High Court held that there is no transfer of property in goods when furniture manufactured is transferred from one unit to other. Hence, there would be no violation of condition (i) or (vii) of the Notification No. 30/97-CUS dated 1 April 1997 as there is no transfer in violation of the actual user condition.

Facts-

In the present case, the Respondent had obtained five advance licences with actual user condition. 83,128 kgs of imported Lauryl alcohol was received in the Respondent’s M-3 Unit Tarapur instead of its V-23 Taloja Unit. Pursuant to intelligence received by the Department that Lauryl alcohol imported by the Respondent under the Advance Licence Scheme by availing exemption under the said Notification No. 30/97-CUS dated 1 April 1997 had been directed or transferred in contravention of the conditions of the said exemption Notification, the Appellant issued a show cause notice dated 20 September 2004 seeking explanation from the Respondent to show cause as to why the duty exempted material of 83,128 kgs of Lauryl alcohol imported under the licence should not be confiscated under Section 111 of the Customs Act. And since the goods were not available for confiscation, as to why the Respondent should not be held liable to pay fine in lieu of confiscation along with the customs duty on the material and why further penalty under Section 112 of the Customs Act should not be imposed upon the Respondent and on Shri. Sadanand Shetty, the Senior executive of the firm.

The Commissioner of Customs (Export Promotion) confirmed the demand. Whereas, CESTAT allowed the Appeal of the Respondent and set aside the order in Original. Against the order of the CESTAT, the Commissioner of Customs (EP) has preferred these Appeals.

Conclusion-

Held that when furniture manufactured in the petitioner unit was transferred to other units, there was no transfer of property in goods from one person to another, and hence, no sale liable to tax under the Act.

The above decision supports our view, and therefore, there would be no violation of condition (i) or (vii) of the Notification No. 30/97-CUS dated 1 April 1997 as amended by Notifications upto No.63/2004-CUS as there is no transfer in violation of the actual user condition, the discharge of export obligation not being in question.

FULL TEXT OF THE JUDGMENT/ORDER OF BOMBAY HIGH COURT

Both these Appeals arise out of a common order dated 24 July 2006 passed by the Customs Excise and Service Tax Appellate Tribunal (for short “the CESTAT”), West Zonal Bench at Mumbai.

2. M/s.Galaxy Surfactants Ltd., the Respondent herein, is a company engaged in the manufacture and export of Surfactants, Speciality Chemicals such as Sodium Lauryl Sulphate (SLS) and Sodium Lauryl Ether Sulphate (SLES), which chemicals are used as raw materials for the manufacture of toothpaste, shampoo etc. The Respondent statedly has one manufacturing unit at Taloja and fve manufacturing units at Tarapur. The Respondent has a unit at V-23, MIDC at Taloja where the Respondent manufactures SLS and SLES. One of the major and important raw material required for manufacture of SLS and SLES is Lauryl alcohol. The Respondent, it is submitted, has been sourcing Lauryl alcohol either through indigenous purchase on payment of appropriate excise duty or it is imported under advance licence without payment of duty or it is imported on payment of customs duty. In the present case, the Respondent had obtained five advance licences with actual user condition.

3. Under General Exemption no.81 pursuant to Notification No. 30/97-CUS dated 1 April 1997 as amended by Notifications upto No.63/2004-CUS dated 14 May 2004 (the “said notification”), materials imported into India against an advance licence with actual user condition in terms of paragraph 7.4 of the Export and Import Policy 1997-2002 (for short the “EXIM Policy”) would be exempt from the whole of the duty of customs leviable thereon.

4. During the period from 16 October, 1998 to 5 November, 1998, 83,128 kgs of imported Lauryl alcohol was received in the Respondent’s M-3 Unit Tarapur instead of its V-23 Taloja Unit. Pursuant to intelligence received by the Department that Lauryl alcohol imported by the Respondent under the Advance Licence Scheme by availing exemption under the said Notification No. 30/97-CUS dated 1 April 1997 had been directed or transferred in contravention of the conditions of the said exemption Notification, the Appellant issued a show cause notice dated 20 September 2004 seeking explanation from the Respondent to show cause as to why the duty exempted material of 83,128 kgs of Lauryl alcohol imported under the licence should not be confiscated under Section 111 of the Customs Act. And since the goods were not available for confiscation, as to why the Respondent should not be held liable to pay fine in lieu of confiscation along with the customs duty on the material and why further penalty under Section 112 of the Customs Act should not be imposed upon the Respondent and on Shri. Sadanand Shetty, the Senior executive of the frm. The Respondent fled reply dated 14.12.2005 and written submissions dated 27.12.2005 wherein the Respondent challenged the demand on diverse grounds.

5. The Commissioner of Customs (Export Promotion) proceeded with the adjudication and after hearing the Respondent, passed an Order in Original dated 30 January 2006 confrming the demand and confscated the goods viz.83,128 kgs of imported Lauryl alcohol which was imported under the duty free licence. As mentioned earlier, since the said goods were not available for confscation and no bond, bank guarantees were available, the Commissioner kept this point, while imposing penalty and further held that the duty foregone, amounting to Rs.24,25,856/- was recoverable with applicable interest from the date of frst import clearance till payment of the above duty under Section 28 of the Customs Act read with Section 125(ii) and directed the Respondent to pay the same and further imposed penalty of Rs.2,50,000/- on Shri. Sadanand Shetty.

6. Being aggrieved by the said Order-in-Original dated 30 January 2006, Respondent preferred an Appeal to the CESTAT, Mumbai being Appeal No.C/S/519. By an order dated 24 July 2006, the CESTAT allowed the Appeal of the Respondent and set aside the order in Original.

7.  Against the order of the CESTAT dated 24 July 2006, the Commissioner of Customs (EP) has preferred these Appeals.

8. On 13 September 2007, these Appeals were admitted on the following questions of law :

“(a) Question of law is whether in the facts and circumstances of the case and in law, the Tribunal is right in setting aside the Order in Original passed by the Commissioner of Customs for violating of condition of exemption notification and advance licence?

(b) Question of law is whether in the facts and circumstances of the case and in law, the interpretation given by the Tribunal to the word “actual user” in the policy is justified?

9. We have heard the learned Counsel for the parties and with their able assistance we have perused the papers and proceedings and also considered the rival contentions.

10. Mr. Walve, learned Counsel for the Appellant, would submit that the show cause notice dated 20 September 2009 was issued to the Respondent demanding duty of Rs.24,25,856/- by proposing to deny the benefit of the said Notification on the ground that the imported Lauryl alcohol ought to have been used at Taloja, whereas the Respondent had used the imported duty free goods in the M3 Unit at Tarapur instead of V­23 Unit at MIDC Taloja. This, according to the department, amounts to diversion of the inputs and violates condition (vii) of the said Notification. According to the Appellant, the condition (vii) of the said exemption Notification clearly provides that exempt materials shall not be disposed of or utilized in any manner except for utilization in discharge of export obligation or for replenishment of such material and the materials so replenished shall not be sold or transferred to any other person.

11. Although there is no dispute that the Respondent has discharged the export obligation, however the dispute is with respect to the use of imported Lauryl alcohol at the Respondent’s M-3 Unit at Tarapur instead of its V-23 Unit at MIDC, Taloja, purportedly resulting in a transfer of the duty free material from Taloja to Tarapur. It is, therefore, the case of Appellant that the materials imported being subject to an Actual User Duty Exemption Entitlement Certifcate issued by the Licensing Authority with respect to the value, quantity, description, quality and technical characteristics has been breached, disentitling the Respondent from the duty exemption and making it liable for the penalties imposed.

12. Mr.Sham Walve, learned Counsel for the Appellant refers to the extract of the handbook for the year 1997-2002, April 1997 Edition and draws the attention of this Court to the actual user condition in paragraph 7.16 thereof to submit that the licences granted under this scheme shall be subject to the actual user condition till endorsement of transferability by the licensing authority. He would submit that there has been no endorsement of the transfer of the duty free material meant for the Taloja Unit to the Tarapur Unit and as  such, there has been a breach of the actual user condition. Learned Counsel also refers to paragraph 7.17 under the facility of supporting manufacturers to submit that the licence holder has the option to have the material processed through any other manufacturer including a jobber, however, the said actions shall be solely for the purpose of imported items and fulfllment of the export obligation. Learned Counsel for the Appellants also draws the attention of this Court to paragraph 7.4(ii) of the EXIM Policy to submit that such advance licences and / or material imported thereunder shall not be transferable even after the completion of the export obligation. He submits that since there is a prohibition, transfer of raw material from Taloja to Tarapur was not permitted and the same is in breach of the EXIM Policy.

13. Learned Counsel submits that, therefore, not only condition no.(vii) of the exemption Notification but also the EXIM Policy have been breached by the Respondent. He would submit that if the conditions of the Notification are found violated after the importation of the material, the same are liable for confiscation under Section 111(o) of the Customs Act.

14. Learned Counsel would submit that the statutory record i.e. RG-23A Part-I Register has corroborated the statements of various officials of the Respondent recorded in this connection which clearly show that during the period from 16 October 1998 to 5 November 1998 the quantity of 83,128 kgs of imported Lauryl alcohol was received in M-3 Unit Tarapur instead of V-23 Taloja Unit of the said Respondent as required by the aforesaid statutory provisions. He would submit that when the unit M-3 Tarapur is not having the facility to manufacture resultant export product, SLS or identical product, then it is questionable as to why imported duty free Lauryl alcohol was diverted from V-23 plant Taloja to M-3 Tarapur. Learned Counsel would submit that, therefore, the Respondent had the intention of using the imported Lauryl alcohol to manufacture other products meant for domestic market and that is why the quantity of 83,128 kgs was received at Tarapur plant.

15. It is submitted that, no doubt a person under export obligation can get the goods manufactured either in his own unit or in another unit including a jobbing unit, but the material so sent to another unit or jobbing unit should come back to the manufacturer for discharge of the export obligation. That, the words “for his own use” cannot be interpreted to mean diverted for use in another purpose. Learned Counsel refers to paragraph 3.5 of the EXIM Policy with respect to the issue of defnition of Actual User (Industrial). He submits that the said paragraph reads that Actual User (Industrial) means a person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit. It is submitted that in the present case the importer had discharged the export obligation by using inputs other than the imported inputs. He would submit that, however, that does not mean that the licences are not required to get endorsed the name of the supporting manufacturer / jobber’s name in the licence, if he wants to use these facilities. The learned Counsel submits that, therefore, he is not at a liberty to sell or divert imported inputs to another unit through which the imported inputs have been cleared for domestic market. Mr. Walve would submit that each of the units maintain statutory records. These records cannot be simply ignored because certain other documents like the delivery challan, goods receipt, payment slip etc. shows  receipts of goods in V-23 Taloja unit instead of Tarapur unit. Learned Counsel would submit that the argument of the importer in this regard is not sustainable as all the units of the Respondent are individually registered with the Central Excise and the records maintained by them are statutory in nature and more reliable than the other evidences. Learned Counsel submits that, therefore, this is a clear cut case of diversion of duty free imported inputs for use of goods meant for domestic market in the premises other than mentioned in the advance licences. In support of his contention, Mr.Walve has endeavoured to take us to copies of the Duty Exemption Entitlement Certifcate (for short “the DEEC”) advance licences and submits that atleast Part B of the said licences which at the moment appear to be blank could have contained the name of the Tarapur unit in each of those licences. Part B refers to names and addresses of factories where the ancillaries of the resultant products for export are manufactured. He submits that Part A contains the name and addresses of the unit where the manufacturing activity takes place which does not contain the name of the unit where the inputs have been diverted. Learned Counsel submits that, therefore, the questions of law as admitted be held in favour of the Appellant Revenue and the Appeals be allowed.

16. On the other hand Mr. Sriram Sridharan, learned Counsel for the Respondent Company would submit that there has been no violation of condition (vii) of the exemption notification nor has there been any violation of the Advance licences. He would submit that the Lauryl alcohol that has been imported duty free has been used by one of the units of the Respondent at Tarapur. Referring to condition (vii) of the exemption notification, learned Counsel submits that the clear language thereof indicates that the transfer within the  units of the same person is not at all prohibited. He refers to the language of the said condition no. (vii) and submits that restriction to sell or transfer is to any other person but not within units of the same person. Learned Counsel submits that the person is Galaxy Surfactants Ltd., the Respondent, is a separate legal person and has various units, and therefore, the question of transferring the material to any other person would never arise. He would submit that with respect to the own use condition, the material used by the Tarapur unit is for the own use of the Respondent and not for use by any other person. Learned Counsel relies upon the decision in the case of Government Wood Works vs. State of Kerala¹ in support of his contentions.

17. Learned Counsel for the Respondent also refers to the text of the EXIM Policy and draws the attention of this Court to the defnition paragraph 3.4   regarding “Actual User” and also to paragraph 3.5 where it is stated that Actual User (Industrial) means a person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit. He submits that, therefore, the contention on behalf of the Appellant that the materials so sent to another unit or jobbing unit should come back to the manufacturer for discharge of export obligation do not find place either in exemption notification nor in the EXIM policy, and therefore, such an interpretation would be meaningless. He submits that, therefore, the two questions be answered against the Revenue and in favour of the Respondent.

18. The facts are not in dispute. As mentioned earlier, there is no dispute that the Respondent has discharged the export obligation. Lauryl alcohol which has been imported under the advance licences containing actual user condition has been used at the M- 3 Tarapur Taloja plant of Respondent and not at its V-23 plant at Taloja. The contention for disentitling the Respondent for the benefit of duty exemption is that the actual user condition has not been met by the Respondent.

19. Before proceeding further, it would be apposite to set out the relevant conditions in the said Notification as well as the relevant paragraphs in the EXIM Policy.

20.1 Condition (i) and Condition (vii) as contained in the said General Exemption Notification is quoted as under:

“(i) that the materials imported are covered by an Actual User Duty Exemption Entitlement Certificate (hereinafter referred to as the said certificate), issued by the Licensing Authority in the form of specified in the schedule annexed to this notification, in respect of the value, quantity, description, quality and technical characteristics.

(vii) exempt materials shall not be disposed of or utilised in any manner except for utilisation in discharge of export obligation or for  replenishment of such materials and the materials so replenished shall not be sold or transferred to any other person.”

20.2 Paragraph 3.4 of the EXIM Policy defnes “Actual user” and admittedly as Respondent is an “Actual user (Industrial)”, Paragraph 3.5, the same is also quoted as under:

“3.4 “Actual User” means an actual user who may be either industrial or non-industrial.

3.5 “Actual User (Industrial)” means a person who utilises the imported goods for manufacturing in his own industrial unit or manufacturing for his own user in another unit including a jobbing unit.”

20.3 Paragraph 3.37 defnes person’ as under :

“3.37 “Person” includes an individual, frm, society, company, corporation or any other legal person.”

20.4 Paragraphs 7.4, 7.16, 7.17 of the EXIM Policy with reference to the Duty Exemption Scheme are also usefully quoted as under :

“7.4(i) Notwithstanding anything contained above, exemption from payment of additional Customs duty and Antidumping duty shall be allowed in respect of Advance Licences, issued with actual user condition to :

a) Manufacturer exporter;

b) Merchant exporter where the merchant exporter agrees to the endorsement of the name(s) of the supporting manufacturer(s) on the relevant DEEC Book.

(i) Such advance licences and/or materials imported thereunder shall not be transferable even after completion of export obligation.

(ii) Such licences shall be issued with a positive value addition without stipulation of minimum value addition as prescribed in paragraph 7.9.

7.16 Licences granted under this scheme shall be subject to the Actual User condition till endorsement of transferability by the licensing authority.

7.17 The licence holder has the option to have the material processed through any other manufacturer including a jobber. However, the licence holder shall solely for the imported items and fulfllment of export obligation.”

(emphasis supplied)

21. The said exemption Notification which exempts customs duty on material imported into India against an Advance licence with actual user condition is subject to the condition that the said materials imported are covered by an Actual User Duty Exemption Entitlement Certificate issued by the Licencing Authority as well as the condition that the exempt materials shall not be disposed of or utilized in any manner except for utilization in discharge of the export obligation or for replenishment of such materials and the materials so replenished shall not be sold or transferred to any other person. This means that the exempt materials can either be utilized for discharge of an export obligation or for replenishment of exempt materials and the exempt materials so replenished cannot be sold or transferred to any other person. It is not in dispute that the export obligation has been met. It has been argued on behalf of Appellant that the exempt materials have been diverted to M-3 unit at Tarapur, instead of V-23 Taloja unit and that, therefore, there has been a transfer resulting in breach of condition (vii). It is not in dispute that the V-23 Taloja unit as well as the M-3 Tarapur unit are units of the Respondent. The Respondent is a ‘person’ as defned in paragraph 3.37 of the EXIM Policy where a company is also included in the said defnition. ‘Actual User (Industrial)’ is defned to mean a person who utilizes the imported goods for manufacturing in his own industrial unit or manufacturing for his own use in another unit including a jobbing unit. The Respondent is the person and V-23 and M-3 are the units are of the same person viz. the Respondent and if the imported duty free goods are utilized for his own use in another unit (viz. M-3 at Tarapur unit) then going by the defnition of ‘Actual User (Industrial)’ in paragraph 3.5 of the EXIM Policy, the question of transfer to any other person would not arise.

22.Therefore, the question of breach of paragraph 7.4(ii) of the EXIM Policy which clearly provides that Advance Licences and / or materials imported thereunder shall not be transferable even after completion of the export obligation would not arise. Also, the question of breach of paragraph 7.16 of the EXIM Policy which pertains to actual user condition and provides that the licences granted under this scheme are subject to actual user condition till endorsement of transferable by the Licencing Authority would not arise, as there has been no transfer in the instant case as the materials have been received by one of the Units of the Respondent. Paragraph 7.17 of the EXIM Policy relied upon by Mr. Sham Walve, the learned Counsel for the Appellant, merely provides that the licence holder has the option to have the material processed through any other manufacturer or jobber and that the licence holder shall be solely responsible for the imported items and fulfllment of the export obligation. The Respondent has used the imported material for manufacturing in its own M-3 Unit at Tarapur and there is also no dispute as regards fulfllment of the export obligation. Therefore, in our view, the contentions of the learned Counsel for the Appellant appear to be misplaced. The arguments of Mr. Walve with respect to Part A and Part B of the sid licences as well as the other arguments on facts do not persuade us to take any other view in the matter.

23. Paragraph 10 of the decision of the Kerala High Court in the case of Government Wood Works vs. State of Kerala (supra), relied upon by the learned Counsel for the Respondent is also useful and is quoted as under.

“10. The Tribunal seems to have thought that if the other units to which the furniture was supplied were not “branches” of the petitioner, a sale has to be postulated. The Tribunal has in fact   mentioned that the other units are not registered as branch units of the petitioner and that the petitioner has not paid renewal fee for registration, for the branches, and has on the other hand, paid renewal fee of Rs. 10 only for itself. Logically, an inference of sale has been drawn. We do not agree with this proposition. The effect of registration is only to enable a dealer to collect the tax payable by him from the purchaser. It does not have the effect of carving out an independent existence for the registered unit or to delink it from manufactured in the petitioner-unit was transferred to other units of SIDECO, there was no transfer of property in  goods from one person to another and hence no sale liable to tax under the Act. The turnover of Rs. 1,60,746 was therefore, rightly excluded in the original assessment and was wrongly brought to assessment by the order of the Deputy Commissioner.”

(emphasis supplied)

24. We note that the Kerala High Court while considering the units of Petitioner in the decision above observed that the effect of registration was only to enable a dealer to collect tax payable by him to the purchaser, but it did not have the effect of carving out an independent existence for the registered unit or to delink it from the other units for the purposes of the Act.   The Hon’ble Court observed that, therefore, when furniture manufactured in the petitioner unit was transferred to other units, there was no transfer of property in goods from one person to another, and hence, no sale liable to tax under the Act.

25. The above decision supports our view, and therefore, there would be no violation of condition (i) or (vii) of the Notification No. 30/97-CUS dated 1 April 1997 as amended by Notifications upto No.63/2004-CUS as there is no transfer in violation of the actual user condition, the discharge of export obligation not being in question.

26. Having regard to the above discussion, the questions as raised are answered as under:

“a(Q) Question of law is whether in the facts and circumstances of the case and in law, the Tribunal is right in setting aside the Order in Original passed by the  Commissioner of Customs for violating of condition of exemption notification and advance licence?

Answered in favour of the Respondent and against the Appellant Revenue.

Q(b) Question of law is whether in the facts and circumstances of the case and in law, the interpretation given by the Tribunal to the word “actual user” in the policy is justified?

Answered in favour of the Respondent and against the Appellant Revenue.

27. Having held as above, it would not be necessary for us to dwell on the other arguments canvassed on behalf of the parties.

28. The Appeals stand disposed in the above terms. Parties to bear their own costs.

Notes:

1  (1988) 69 STC 62