Case Law Details

Case Name : Commissioner of Customs Vs Aditya Birla Nuvo Ltd. (Karnataka High Court)
Appeal Number : C.S.T.A. No. 1 of 2010
Date of Judgement/Order : 13/01/2021
Related Assessment Year :
Courts : All High Courts (6436) Karnataka High Court (342)

Commissioner of Customs Vs Aditya Birla Nuvo Ltd. (Karnataka High Court)

Conclusion: Imported material could be disposed of or utilized in any manner including local sale once the export obligations were fulfilled and the only requirement as per condition No.(vii) was that such inputs should not be sold or transferred in the market. In other words, the replenished inputs could be used in manufacture of other products and not necessarily incorporate in export of goods.

Held: Now we may advert to the first issue whether the respondent has violated the actual use condition as  envisaged under Section Notification 30/1997. It is pertinent to note that none of the terms and conditions of Notification No.30/1997 envisgge physical incorporation of imported material in the goods that are exported towards fulfillment of export obligations. The aforesaid Notification grants exemption from the whole of the custom duty and whole of the additional duty to the ‘materials’ imported against an Advance Licence subject to conditions stipulated therein. The word ‘material’ has been defined in Explanation II to mean raw materials, components, intermediates, consumables, computer software and parts required for manufacture of resultant product specified in Part E of the said certificate. It is also pertinent to note that phrase ‘required to manufacture’ as stated in the Notification contemplates possible or intended use and not actual use as clarified in Circular No.36/97 dated 16.09.1997. Thus, the material need not be directly used in the manufacture of resultant product and proof of actual use is not a condition attached to the exemption Notification. The aforesaid position has been explained in the Circular No.36/97 dated 16.09.1997 which was issued specifically in the context of difficulties faced by garment exporters as the custom field formations were insisting that nexus between export product and duty free material imported was required to be established. The imported goods need not be physically used in the manufacture of goods that are exported. Condition (vii) of Notification No.30/97-Cus permitted discharge of export obligation either by usage of imported duty free material or by replenishment material. The only requirement as per condition No.(vii) is that such inputs should not be sold or transferred in the market. In other words, the replenished inputs can be used in manufacture of other products and not necessarily incorporate in export of goods. Thus, from the aforementioned reasons, it is evident that the respondent has not violated the conditions of the Notification No.30/97-Cus and has rightly imported the material and has discharged its export obligations. The tribunal therefore, in the impugned order has rightly held the Circular to be applicable in the case of the assessee.

In the instant case, the licensing authority competent to grant licences allowed the respondent to import polyester / cotton blended fabrics without payment of duty against the export of men’s shirts. The Directorate General of Foreign Trade had issued the advance licence for duty free import after due Notification  that materials could be used for production of export goods. The respondent fulfilled the export obligations in respect of exporting men’s full sleeve shirts of specified value, which was examined by Joint Director of Foreign Trade and Export Obligation Discharge Certificate (EODC) was issued. Thereafter, it was not open for the officers of the customs department to contend that the imported material could not be used for manufacture of shirts and that respondent had not discharged its export obligation by violating the conditions of the exemption Notification No.30/97-Cus. In this connection, reference might be made to decision of the Supreme Court in TITAN MEDICAL SYSTEMS. The Tribunal on the basis of meticulous appreciation of evidence on record had held that the respondent had not violated the conditions of exemption Notification No.30/97-Cus and had discharged its export obligations. The only requirement as per condition No.(vii) was that such inputs should not be sold or transferred in the market. In other words, the replenished inputs could be used in manufacture of other products and not necessarily incorporate in export of goods. It had further been held that there had been no violation of actual user condition. The findings recorded by the tribunal had been recorded after appreciation of evidence on record, by which no stretch of imagination could be said to be perverse.

FULL TEXT OF THE HIGH COURT JUDGMENT

This appeal under Section 130 of the Customs Act, 1962 (hereinafter referred to as the Act for short) has been filed against the order dated 27.05.2009 passed by Customs, Excise and Service Tax Appellate Tribunal, Bangalore (hereinafter referred to as ‘the tribunal’ for short). The appeal was admitted by a bench of this court vide order dated 07.01.2013 on the following substantial questions of law:

“1.Whether the tribunal was right in taking the view that an advance licence creates only rights in favour of the licencee and therefore if the licensing authority is of the opinion that the advance licence had been obtained by misrepresentation, then, the licensing authority cannot take action in terms of the conditions subject to which the licence had been granted without seeking the opinion of the DGFT?

2. Whether the tribunal was right in taking the view that importing a different material than one permitted under the licence does not amount to violation of the conditions of licence or it is not even mis-utilization of the licence?

3. Whether the tribunal was right in taking the view that imported material can be disposed of or utilized in any manner including local sale once the export obligations are fulfilled and if such view is not in the teeth of Condition No.7 imposed under the advance licence in terms of customs notification No30 of 1997 dated 1-4-1997?”

2. Facts leading to filing of this appeal briefly stated are that the respondent is leading exporter of branded Men’s readymade garments. In addition to export, the branded readymade garments are sold on domestic market on payment of applicable central excise duties. The respondent was carrying on the business of division of M/s Madura Coats Ltd. till 31.12.1999. M/s Madura Coats Ltd. had obtained two advance licenses dated 21.08.1998 and 13.05.1999 from the Joint Director General of Foreign Trade, Bangalore for procurement of duty free fabrics with consequential obligation for export of garments. The advance licenses were obtained for import of fabrics without payment of customs duty by availing the exemption under Notification No.30/97-Cus dated 01.04.1997. Under the aforesaid two advance licenses, M/s Madura Coats Ltd. undertook duty free import of cotton, polyester blended fabric through ICD, Bangalore between the period from 16.07.1999 to 30.09.1999. The total duty foregone was Rs.48,05,563/- and Rs.77,34,945/- for each of the advance licences respectively.

3. A show cause notice dated 03.03.2006 was issued to the respondent demanding customs duty to the extent of Rs.48,05,563/- along with interest with proposal to confiscate goods valued at Rs.64,87,647/-along with proposal to impose penalty. The show cause notice was issued inter alia on the ground that though advanced licenses in question were issued for export of men’s shirts, whereas, respondent imported fabrics meant for trousers. It was further stated that in the notice that the respondent had utilized the entire quantity of imported duty free fabrics for manufacture of trousers, which were sold in the local market which amounts to violation of conditions contained in the Notification No.30/97-Cus. It was also stated that goods were got manufactured by the respondent through certain job workers who were not indicated as supporting manufacturers in the two advance licenses in question. The respondent submitted a reply on 24.07.2006 to the said show cause notice. The adjudicating authority after affording an opportunity of hearing to the respondent, by an order dated 28.02.2008 confirmed the proposals made in the notice. The respondent thereupon challenged the aforesaid order in an appeal before the tribunal, which was allowed by an order dated 27.05.2009. Thereupon, the revenue filed an appeal before this court which was disposed of by a bench of this court vide order dated 26.04.2014 inter alia on the ground that the dispute does not fall within the jurisdiction of this court as contemplated under Section 130 of the Act and the only remedy available to the revenue is to challenge the order under Section 130E of the Act before the Supreme Court. The Supreme Court by an judgment dated 05.09.2019 set aside the order passed by a bench of this court and remitted the matter to high court for de no vo consideration of the appeal on merits. In the aforesaid factual background, this appeal has come up before us.

4. Learned counsel for the appellant while inviting the attention of this court to paragraph 130 of the order passed by the adjudicating authority submitted that the respondent had obtained two advance licences with actual user condition and the respondent got manufactured around 41,600 and 76,500 number of trousers by utilizing polyester / cotton blended fabrics imported against advance licenses dated 21.08.1998 and 13.05.1999 through M/s Classical Menswear Private Limited and M/s Art Clothing Company and M/s Tristar. It was also pointed out that in addition to above quantities, the respondent also got manufactured about 8,300/- trousers of various style codes by utilizing the said imported polyester / cotton blended fabrics and the raw materials i.e., the fabrics were used for manufacture of trousers and the respondent had diverted the balance quantity of trousers to local / domestic market through the retail outlets and thus had violated conditions ( vii) and (viii) of the Notification No.30/97-Cus. It is further submitted that the tribunal has not dealt with the findings of the investigating authority and it ought to have been appreciated that Conditions ( vii) and (viii) have been violated by the respondent and interpretation put forth by the tribunal is contrary to terms and conditions of the Notification. It is also submitted that an exemption rectification is required to be construed strictly. In support of aforesaid submissions, reliance has been placed on decisions in ‘SHESHANK SEA FOOD (P.) LTD. VS. UNION OF INDIA’, 1996 TAXMANN.COM 207 (SC), ‘COMMISSIONER OF CUTOMS (IMPORTS), MUMS AI VS. DILIP KUMAR & COMPANY’, (2018) 95 TAXMANN.COM 327 (SC) AND ‘THE COMMISSIONER OF CUSTOMS VS. M/S MOTOROLA INDIA LIMITED’, ‘CSTA NO.2/2007 DATED 06.01.2021.

5. On the other hand, learned counsel for the respondent submitted that it has not violated the actual conditions of use as envisaged under Notification No.30/97-Cus. It is further submitted that the assertion of the appellant that the respondent has failed to manufacture full sleeve shirts out of the imported material and has used it for manufacture of trousers which were ultimately diverted to local market is incorrect. It is also pointed out that the Notification No.30/97-Cus does not envisage physical incorporation of the imported materials in the goods which are imported towards fulfillment of export obligations. It is also submitted that the phrase ‘required for manufacture’ as stated in the Notification contemplates possible or intended use and not the actual use as has been clarification is Circular No. 36/97 dated 16.09.1997. It is also contended that the respondent shall also be entitled to exemption if the respondent produces a commercially known product. Reliance has been placed on Notification Nos.80 /95 and 204/95. It is also urged  that imported goods have rightly been replenished in the present case without any violations of conditions of exemption Notification and there is no violation of actual user of condition in the present case. It is also pointed out that the nexus between the imported material and exported goods are not required to be proved before custom authorities, once export obligations are met. Our attention ha also been invited to para 4.3 of Chapter IV of EXIM Policy, 1997-2002. It is also pointed out that the licensing authority did not raise any dispute in granting the licence as well as Export Obligation Discharge Certificate (EODC), as the customs authorities cannot now sit in judgment over such action taken by the authorities, more so, when no proceedings have been initiated by Directorate General of Foreign Trade. It is also urged that principles of constructive res judicata applies to the fact situation of the case as the issue of grant of Export Obligation Discharge Certificate (EODC) has been exempted by two authorities independently and have been accepted after scrutiny and therefore, the appellant cannot repeatedly examine the same licences at various intervals and raise new objections at each time. In support of aforesaid submissions, reliance has been placed on decisions in ‘OBLUM ELECTRICAL INDUSTRIES PVT. LTD. VS. CC, BOMBAY’, 1997 (94) ELT 449 (SC), ‘CC, KOLKATA VS. RUPA AND CO. LTD.’, 2004 (170) ELT 129 (SC), ‘TITAN INDUSTRIES LTD. VS. ADDL. COMMISSIOER OF CUSTOMS’, 2003 (158) ELT 437 (MAD), ‘AUTOLITE (I) LTD. VS. UNION OF INDIA REPORTEDI N 2003 (157) ELT 13 AND ‘TITAN MEDICAL SYSTEMS VS. CC, NEW DELHI, 2003 (151) ELT 254 (SC).

6. We have considered the submissions made by learned counsel for the parties and have perused the record. Before proceeding further, we deem it appropriate to refer to clause (vii) and relevant extract of  clause (viii) of Notification No.30/1997-Cus dated
01.04.1997 and clarification issued vide Circular dated 30.06.1997-Cus dated 16.09.1997, which reads as under:

(vii) 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 materials and the materials so replenished shall not be sold or transferred to any other person.

(viii) that in relation to an Advance Licence issued to a Merchant Exporter –

(a) the name and address of the supporting manufacturer is specified in the said licence and the said certificate and the one required to be executed by the importer in terms of condition (ii) shall be executed jointly by the Merchant Exporter and the supporting manufacturer binding themselves jointly and severally to comply with the conditions specified in this Notification; and

(b) exempt materials are utilized in the factory of such supporting manufacturer in terms of in terms of condition (vii).

2. Instances of this type are being raised giving the impression that the staff in the Custom Houses are not aware of or are not implementing Board’s instructions contained in Circular Nos.4/93 dated 04.03.1993, 1/94 dated 05.01.1994 and 34/94, dated 12.12.1994 and Member (customs) letter F.No.605/373/96 -DBK, dated 16.01.1997.

These instructions clearly spell out that correct interpretation of the words ‘raw materials required for use’, does not mean that raw-materials must be physically incorporated. It was also clarified with the help of examples that inputs may be allowed even if they are not exactly those used in the export product but provided the inputs are commercially known to be useable in the product exported.

3. Further, it appears that at the stage of logging of Par-II of DEEC Book, the exporters have, in some cases, been asked to establish that the entire quantity of raw materials, mainly fabric, was used in the manufacture of Garment entered for export. Attention in this regard is invited to Exemption Notification Nos.30/97 and 31/97 both dated 01.04.1997 (QBAL), Para (V) of both the Notifications only requires that the exporter must discharge his export obligation by exporting the “resultant products” which are specified in Part (E) of Duty Entitlement Exemption Certificate. The part (E) specified both the quantity and FOB value of export products which has to be exported as also the quality and technical

characteristics of the export product. So long as the exported product meets the requirements indicated in Part (E) of DEEC Book, Customs House should not go into any extraneous questions pertaining to the size of the Garment and utilization of total quantity of fabric permitted for import in Part-I-C of DEEC Book. The satisfaction of Assistant Commissioner at the stage of logging is not doubt with regard to the conditions specified in Exemption Notification, but it must be exercised without asking for information which goes beyond the ingredients specified in the Exemption Notification and in the format of DEEC Book appended to the Notification.

7. Now we may advert to the first issue whether the respondent has violated the actual use condition as  envisaged under Section Notification No.30/1997. It is pertinent to note that none of the terms and conditions of Notification No.30/1997 envisgge physical incorporation of imported material in the goods that are exported towards fulfillment of export obligations. The aforesaid Notification grants exemption from the whole of the custom duty and whole of the additional duty to the ‘materials’ imported against an Advance Licence subject to conditions stipulated therein. The word ‘material’ has been defined in Explanation II to mean raw materials, components, intermediates, consumables, computer software and parts required for manufacture of resultant product specified in Part E of the said certificate. It is also pertinent to note that phrase ‘required to manufacture’ as stated in the Notification contemplates possible or intended use and not actual use as clarified in Circular No. 36/97 dated 16.09.1997. Thus, the material need not be directly used in the manufacture of resultant product and proof of actual use is not a condition attached to the exemption Notification. The aforesaid position has been explained in the Circular No. 36/97 dated 16.09.1997 which was issued specifically in the context of difficulties faced by garment exporters as the custom field formations were insisting that nexus between export product and duty free material imported was required to be established. The imported goods need not be physically used in the manufacture of goods that are exported. Condition (vii) of Notification No.30/1997-Cus permitted discharge of export obligation either by usage of imported duty free material or by replenishment material. The only requirement as per condition No.(vii) is that such inputs should not be sold or transferred in the market. In other words, the replenished inputs can be used in manufacture of other products and not necessarily incorporate in export of goods. Thus, from the aforementioned reasons, it is evident that the respondent has not violated the conditions of the Notification No.30/1997-Cus and has rightly imported the material and has discharged its export obligations. The tribunal therefore, in the impugned order has rightly held the Circular to be applicable in the case of the assessee.

8. From perusal of clause 3.4 and 3.45 of export import policy 1997-2002, it is evident that licence holder is free to get in the material processed through not just supporting manufacturers specified in the licence but also through other job workers as imported goods and exported goods are properly accounted for. This requirement has been duly fulfilled by the respondent inasmuch as there has been a proper account of imported material as well as exported goods details of which were furnished to the officer which were duly accepted. Therefore, there is no violation of actual user condition.

9. In the instant case, the licensing authority competent to grant licences allowed the respondent to import polyester / cotton blended fabrics without payment of duty against the export of men’s shirts. The Directorate General of Foreign Trade has issued the advance licence for duty free import after due Notification that materials can be used for production of export goods. The respondent fulfilled the export obligations in respect of exporting men’s full sleeve shirts of specified value, which was examined by Joint Director of Foreign Trade and Export Obligation Discharge Certificate (E ODC) was issued. Thereafter, it is not open for the officers of the customs department to contend that the imported material cannot be used for manufacture of shirts and that respondent has not discharged its export obligation by violating the conditions of the exemption Notification. In this connection, reference may be made to decision of the Supreme Court in TITAN MEDICAL SYSTEMS supra.

10. The tribunal on the basis of meticulous appreciation of evidence on record has held that the respondent has not violated the conditions of exemption Notification No.30/1997-Cus and has discharged its export obligations. It has further been held that there has been no violation of actual user condition. The findings recorded by the tribunal have been recorded after appreciation of evidence on record, by which no stretch of imagination can be said to be perverse.

11. In view of preceding analysis, substantial questions of law framed by a bench of this court are answered against the revenue and in favour of the assessee. In the result, we do not find any merit in this appeal, the same fails and is hereby dismissed.

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