We find from the scheme of the Customs Act, 1962 and the Foreign Trade (Development and Regulation) Act, 1992 that whenever a dispute may arise as to the classification of the goods, other than its description, quantity and FOB value, the customs authorities have to refer the dispute for adjudication to DGFT under Section 13 of the Act. It is only if the DGFT as the licensing and also adjudicating authority decides against the licensee, that the customs authorities will get jurisdiction to confiscate and levy penalty on such goods. (Para 21)
The writ petition is allowed. The order of the Commissioner of Customs and Central Excise, Kanpur dated 30.3.2009 is set aside. The Commissioner, Customs and Central Excise is directed to refer the matter with all the material including the report obtained form CRCL to the Director General of Foreign Trade, New Delhi. If the Director General of Foreign Trade finds that goods are not of the classification for which the license was granted for DEBP, he may proceed to take steps in accordance with the Foreign Trade (Development and Regulation) Act, 1992 and it is only thereafter that the customs authorities may invoke the provisions of the Customs Act, 1962. (Para 22)
IN THE HIGH COURT OF ALLAHABAD
Civil Misc. Writ Petition No. 1343 of 2009
PTC Industries Ltd.
Union of India & Ors.
CORAM: Hon. Sunil Ambwani, J. and Hon. Virendra Singh, J.
Date of Judgment: 18.12.2009
J U D G M E N T
1. The petitioner-company is carrying on business of manufacture and export of steel castings, forged assembly parts and other products including forgings to various countries in Europe and USA and has been awarded One Star Export House status by the Director General of Foreign Trade (DGFT), Government of India, New Delhi. The petitioner manufactures/ forges a stainless steel product called ‘raised hatch’/ ‘hatch’ used in barges for transporting goods over water.
2. The Foreign Trade (Development and Regulations) Act, 1992 (the Act) provides for regulation and announcement of export and import policy of the Central Government. Para 2.4 of the Foreign Trade Policy for 2004-09, made under Section 5 of the Act and Para 1.1 of the Hand Book of the procedure of the DGFT Policy provides for Duty Entitlement Pass Book (DEPB) scheme for shipment of various classified goods outside the country. The DEPB can be used for setting off the import duty and can also be traded. All the goods including the ‘raised hatch’/ ‘hatch’, exported by the petitioner fall under Item No.530B of Product Group; Engineering Products entitled to DEPB to the extent of 8% of the FOB value of the goods exported up to the maximum of Rs. 400/- per kg. as provided in the schedule of DEPB.
3. Para 2.3 of Chapter II of the Foreign Trade Policy 2004-09, provide that any interpretation of the policy about the classification of any goods of any item or schedule or DEPB rate shall be referred to the DGFT, whose decision shall be final. Para 2.3 is quoted as below:-
“2.3. Interpretation of Policy
If any question or doubt arises in respect of the interpretation of any provision contained in this Policy, or regarding the classification of any item in the ITC (HS) or Handbook (Vol.1) or Handbook (Vol.2), or Schedule of DEPB Rate the said question or doubt shall be referred to the Director General of Foreign Trade whose decision thereon shall be final and binding.
If any question or doubt arises whether a license/certificate/ permission has been issued in accordance with this Policy or if any question or doubt arises touching upon the scope and content of such documents, the same shall be referred to the Director General of Foreign Trade, whose decision thereon shall be final and binding.”
4. A notice was issued by the Directorate of Revenue Intelligence, Customs & Central Excise, Lucknow Zone, Lucknow on 30.9.2008 to the petitioner company under Section 28 of the Customs Act, 1962 to appear before the Commissioner of Customs, Kanpur and New Delhi for adjudication of the classification of ‘raised hatch’ being exported by the petitioner. The petitioner immediately took up the matter with DGFT giving all details about the manufacturing process undertaken by the petitioner and its job work. The DGFT by its letter dated 29.4.2008, addressed to the petitioner as follows:-
“The undersigned is directed to refer to your letter dated 15th February, 2008 on the subject noted above. It is informed that the case was considered by DEPB Committee (Inter-Ministerial Committee) at DGFT (Headquarters) and Committee after detailed discussion and perusal of the facts and figures along with the list of components required to manufacture the product “Hatch” (placed before the committee), accordingly took the following decision:-
The firm M/s PTC Industries Ltd. Lucknow shall be entitled for DEPB for the product “Hatch” made predominantly of Stainless Steel (Not less than 90% by weight) under the DEPB rate notified at DEPB Sl. No. 530B of Engineering products (Code 61). The firm would submit the copy of the bill of material to Customs authority at the port of export thereby specifying the components used, their weight along with the grade of stainless steel used justifying not less than 90% by weight clause for stainless steel components.
Deputy Director General of Foreign Trade”
5. The petitioner filed a Writ Petition No.369 of 2009 challenging the notice issued by the Customs and Central Excise, Kanpur in the High Court. By an order dated 5.2.2009 the Court directed the Commissioner to decide the issue of jurisdiction before proceeding further in the matter.
6. By the order dated 30.3.2009 under challenge the Commissioner, Customs & Central Excise, Kanpur has decided the objections to the jurisdiction, and has held that the misdeclaration of goods for export claiming undue DEPB benefits, is supported with the test report of Central Revenue Control Laboratory (CRCL). There may not be any doubt that the proper authority for deciding confiscability and penal action for rendering the goods liable for confiscation is under the Customs Act, 1962. The DGFT action of cancellation of license issued against export of misdeclared goods starts once the adjudicating authority of customs confirms the charge of misdeclaration.
7. The Commissioner did not find anything in Circular No.15 of 1997-CUS to take away the authority of the Customs Officer, to deal with the goods admitted to be exported by misdeclaration under the provisions of Customs Act, 1962. The exporter has enclosed the clarification on admissibility of DEPB dated 29.4.2008 from DGFT. The said classification was issued by DGFT on the application of the exporter without disclosing the result of the physical examination by DRT, CRCL test report and the fact of investigation. The DRT investigation and CRCL test report has revealed that the goods are not as per the declaration in the export shipping bill. The Commissioner also forwarded a copy of the show cause notice to DGFT, New Delhi for taking appropriate action against the petitioner under the Foreign Trade (Development and Regulation) Act, 1992, and the Foreign Trade Regulation Rules, 1993 and requested him to start the action of cancellation of license issued against the export of mis-declared goods.
8. We have heard Shri Bharat Ji Agarwal, Sr. Advocate assisted by Shri Rahul Agrawal for the petitioner. Shri Ramesh Chandra Shukla appears for Commissioner, Customs and Central Excise. Shri Ajay Bhanot appears for Director General of Foreign Trade.
9. Before considering the submissions, it will be appropriate to consider the stand taken by the Commissioner as well as DGFT. Shri V.K. Misra, Deputy Commissioner, Central Excise, Kanpur has stated in his counter affidavit that the description of the goods was deliberately manipulated by the exporter to fraudulently obtain maximum benefit under DEPB scheme, and thus goods have been rendered prohibited goods as soon as they were presented for export at the port in contravention of the Customs Act, 1962 rendering them liable for confiscation under the Customs Act. The DEPB credit is given by DGFT later, on the production of documents evidencing export of goods. When the export itself is fraudulent, no further benefits/ incentives are allowable. The physical examination was procured by DRT from Central Revenue Control Laboratory (CRCL). The report of CRCL was not provided to DGFT. The CRCL has opined that sample appears to be a machine part made by different components by welding or clipping i.e. fabrication process. The Central Revenue Control Laboratory (CRCL), New Delhi is government analytical laboratory and its report is completely trustworthy. The goods were not manufactured out of forging process but by fabrication process. The show cause notice and the consideration of its reply is within the jurisdiction of the Commissioner, Customs and Central Excise. The Commissioner in submitting that the goods were manipulated by exporter and are prohibited goods, has placed reliance upon Om Prakash Bhatia Vs. CC, Delhi, 2003 (155) ELT 425 (SC) and Hindustan Liver Ltd. Vs. CC (I) Nhava Sheva, 2008 (226) ELT 361, a decision by the Tribunal holding that the facts distorted to avail inadmissible DEPB credit and persistence made for that is a case of malafide for taking action under Rule 14 of the FTC ( D & R) Rule, 1993 and hence the goods are liable for confiscation under Section 113 (i) and (d) of Customs Act, 1962.
10. Shri Mahesh Chandra, Joint Director of Foreign Trade at Kanpur has stated in his affidavit that if any question or doubt arise in respect of interpretation of any provision contained in FTP, or classification of any item in ITC (HS) or HBP – Volume 1 of HBP Vol.2 or schedule of DEPB rates (including contents, scope or issue of an authorization there under) the question or doubt is referred to DGFT, whose decision thereon shall be final and binding. Chapter 4 of the FTP provides for grant of DEPB benefit is subject to fulfillment of conditions stated therein and the procedure laid there under. Para 4.42 of Chapter 4 of Hand Book of Procedure Vol.1 (2004-09) it is stated that credit under DEPB shall be utilized for payment of customs duty on any item including capital goods. On the basis of declaration made by company and also certificate from Chartered Engineer produced by it, stating that components had been manufactured through Forging Process and also Bill of Material produced by the firm, DEPB Committee i.e. an inter ministerial committee, clarified that the product ‘Hatch’ is covered under DEPB Rate Schedule Sl. No. 530B of the product Group ‘Engineering’ subject to the condition that the firm would submit the copy of bill of material to Customs authority at the port of export thereby specifying the components used, their weight along with the grade of stainless steel used justifying ‘not less than 90% by weight’, clause for stainless steel components. Under para 2.3 of Chapter 2 of Foreign Trade Policy 2004- 09, if any question or doubt arise in respect of interpretation the said question or doubt shall be referred to DGFT, whose decision thereon shall be final and binding. Keeping in view the declaration made by the firm along with list of components the DGFT found that ‘hatch’ made predominantly of stainless steel is covered under DEPB Entry No. Sl.530B subject to the condition as above.
11. Shri Bharat Ji Agarwal submits that DEPB benefit is not extended under the provisions of Customs Act. It has its origin under export import policy pronounced periodically and that the benefit is administered entirely by DGFT under Ministry of Commerce of the Central Government. The Circular dated 3.6.1997 clearly mentions that role of the custom authorities should be confined to the verification of correctness of the exporters declaration regarding description, quantity and FOB value of the export product. The question whether the goods were actually exported or to be exported would fall under any classification and the correctness of the rates to be followed can be decided only by the licensing authority i.e. DGFT under Section 6 of the Act. In view of the para 2.3 of the policy quoted as above, framed under Section 5 of the Act read with circular issued by the Board, the questions regarding classification can be decided by DGFT. The customs authorities have no jurisdiction to issue any notice or to adjudicate on the basis of wrong classification. In Adani Exports Vs. Asstt. Commissioner of Customs, Cochin, 2006 (199) ELT 612 it was held that customs authorities can only make a reference to DGFT for examination of the classification. It is for the DGFT to give an opportunity of hearing and to pass necessary orders. The customs authorities can only report to DGFT, when there is a discrepancy between the goods declared and the exported. The customs authorities have erred in law in assuming jurisdiction to decide over the description and classification of the goods.
12. The Customs Act, 1962 provides in Section 11, in Chapter IV the prohibitions on importation and exportation of goods for the purposes of maintaining security of India, public order and standards of decency or morality etc. provided in sub-section (2) and detection of illegally imported goods and prevention of shortage of goods and the disposal thereof in Chapter IV A. The customs authorities can prevent or detect illegal export of goods. The powers to exempt lies with the Central Government, by notification in the official gazette to exempt any goods or any class or description from any of the provisions of Chapter IV A or Chapter IV B. The levy and exemption from customs duties is provided in Chapter V. The Act provides for advance rulings in chapter VB. The provisions relating to conveyances carrying imported or exported goods are given in Chapter VI. The clearance of imported goods and exported goods in provided Chapter VII. Goods in transit in Chapter VIII; Warehousing in Chapter IX, drawback in Chapter-X; special provisions regarding baggage, goods imported or exported by post and stores in Chapter XI; searches, seizure and arrest in Chapter XIII and confiscation of goods and conveyances and imposition of penalties in Chapter XIV. The settlement is provided in Chapter XIVA and that the powers of appeal and revision are provided in Chapter XV.
13. Section 113 provides for confiscation of goods attempted to be improperly exported. The customs authorities can also under Clause (ii) confiscate any goods entered for exportation under claim for drawback, which do not correspond in any material or that any information furnished by the exporter or manufacturer under the Act in relation to the fixation of rate of drawback under Section 75. The penalty for an attempt to export goods improperly is provided in Section 114 and includes a penalty not exceeding 5 times of the value of goods or one thousand rupees, whichever is greater. If there is any prohibition enforced in respect of such goods, the penalty not exceeding five times, or Rupees one thousand, in case of dutiable goods other than prohibited goods, and in the case of drawbacks a penalty not exceeding five times the amount of draw back claimed or Rupees one thousand for short levy and non levy of duty can be levied. Section 114A provides for penalty under sub-section (2) of Section 28.
14. The Foreign Trade (Development and Regulation) Act, 1992 provides for development and regulation of foreign trade by facilitating imports into, and augmenting exports from India and for matters connected therewith or incidental thereto. The Director General of Foreign Trade is appointed under Section 6 and may be authorized under sub-section (3) by the Central Government that any power exercised by it other than powers under Section 3, 5, 15, 16 and 19 may also be exercised by the Director general or such other officers subordinate to Director General. The Importer-Exporter Code number and license is given under Chapter III, which provides under Section 7 for grant of number and in Section 8 for suspension and cancellation of importer exporter code number. The issue, suspension and cancellation of license falls under Section 9. The search, seizure, penalty and confiscation is provided in Chapter IV, which also gives powers of search and seizure under Section 10. In case of contravention of provisions of this Act, rules, orders and export and import policy, the penalty is provided under sub-section (2). Section 12 and 13 providing for the penalty not to interfere with other punishment and the adjudicating authority are quoted as below:-
“12. Penalty or confiscation not to interfere with other punishments- No penalty imposed or confiscation made under this Act shall prevent the imposition of any other punishment to which the person affected thereby is liable under any other law for the time being in force.
13. Adjudicating Authority- Any penalty may be imposed or any confiscation may be adjudged under this Act by the Director General or, subject to such limits as may be specified, by such other officer as the Central Government may, by notification in the Official Gazette, authorize in this behalf.”
15. A notice is required to be given under Section 14 of the Act before making any order imposing penalty or adjudication or confiscation. Chapter V provides for appeal and revision and the miscellaneous provisions including powers to make rules is provided in Chapter VI.
16. The scheme of the Customs Act, 1962 and the Foreign Trade (Development and Regulation) Act, 1992, provide that whereas the officers on the check post or port and the point of entry and exit, have powers to prevent or detect the illegal exports of goods, and also confiscate the goods attempted to be improperly exported, which includes dutiable or prohibited goods, they do not have powers to question the classification of goods. If a dispute arises as to classification of the goods entitled for DEPB, the powers for adjudication for penalty or confiscation, in the event of contravention of the provisions of the Foreign Trade (Development and Regulation) Act, 1992, or any rules or order made there under, is with DGFT. Section 12 of the Act provides that powers to impose penalty or confiscation under Section 11 of the Act does not prevent the imposition of any other punishment, under any other law for the time being in force. If a person is liable under any other law, which may include Customs Act, 1962 for levy of penalty or confiscation, the same may be in addition to penalty or confiscation provided under Section 11 of the Foreign Trade (Development and Regulation) Act, 1992 and is also in addition to the suspension or cancellation of the license under the Act.
17. The Department of Revenue, Ministry of Finance, Government of India in its circular dated 3.6.1997 had clarified that the role of customs authorities in the matter of DEPB scheme introduced in the new export and import policy for the period 1997-2002 was confined to verification of correctness of exporters declaration regarding description, quantity, and FOB value of the export-product. It is for the licensing authority to ensure that the credit is permitted at the correct rate as notified by DGFT. The word description occurring in this circular, does not extend to adjudication on description or classification. If there is any doubt to the description or classification at the time of verification, the matter has to be referred to DGFT for declaration under Section 13 of the Foreign Trade (Development and Regulation) Act, 1992. If the DGFT decides after giving an opportunity to the owners of the goods that the goods do not meet the description and classification for DEPB, the owner of the goods may in addition to the confiscation and penalty under the Foreign Trade (Development and Regulation) Act, 1992, be punished with penalty under the Customs Act, and that he may also be liable for suspension or cancellation of the license. The customs authority, however, are not entitled to adjudicate over description and classification of the goods for DEPB.
18. In Pradip Polyfils Pvt. Ltd. Vs. Union of India, 2004 (173) ELT 3 (Bom.) a somewhat similar question arose for consideration. The petitioner had exported filter plates and accessories made by Polypropylene under DEBP Scheme through Bombay coastal area at Bombay for which DEBP licenses were issued by DGFT Surat. The customs authorities rejected the claim for credit of duty on the grounds that the goods exported did not fall under Chapter 39 of ITC (HS) classification of export import item, which is a precondition for claiming credit under Sl.14, of public notice No.6, dated 15.4.1998. It was not in dispute that DEBP licenses were issued against export of Polypropylene filter plates and accessories as contained in shipping bills, which was required to be forwarded to the customs for verification of the particular set out in the shipping bills and necessary endorsements. The verification of the customs authorities under Circular No.15 of 1997 dated 3.6.1997 was restricted to the description, quantity, and FOB value of the export products set out in the shipping bills. The customs authorities did not allege that there was any discrepancy in the description, quantity and FOB value. Under the circumstances, the Bombay High Court held that when DEBP license is issued, the petitioners are entitled to DEBP in respect of Polypropylene, filter plates and accessories. The customs authorities were not justified in rejecting the claim on the ground that the articles exported were not covered under Chapter 39 ITC (HS) classification. Whether an item falls under Chapter 39 of ITC classification or not is for the licensing authority to consider before issuing the license. Even after issuance of the license the licensing authority has powers to decide if the licenses were wrongly issued. The orders of the customs authorities were quashed and set aside.
19. In this case the customs authorities alleged on the basis of a report of CRCL that the goods produced for export were not manufactured through forging process, but were welded or clipped. The report of CRCL was obtained exparte without issuing notice or associating the petitioner in the inspections. The report verifies that the ‘sample appears to be machine part made by different components by welding or clipping. The different components of the sample confirm to the composition of stainless steel, 18/8, except one component (nut part); one component (nut part) composition is other than stainless steel. The carbon contained in sample is less than 1.2% by weight, in each component of the sample. The description of the goods at the time of presenting them for export was not reported by CRCL to be nonconforming to the classification of the goods. The contents of the stainless steel was not in dispute. The customs authorities were concerned with the fact whether the goods meet the license classification namely whether the DE-343-5, 19 inches raised hatch (SS) Code No.74 964, was required to be a forged machine part or a fabricated machine part in which different components could be welded or clipped. The goods would not become prescribed goods just because they did not meet the classification, which according to the customs authorities could only be obtained by forging and not by welding or clipping. The customs authorities have thus observed on their own satisfaction that the goods do not meet the classification for which the petitioner was given license for DEBP credit.
20. It is not a case of mis description or false declaration of goods. At best it is case in which it was to be found whether the welding or clipping could be included, or can be taken to be forging, when according to DGFT the hatch was to be made predominantly of stainless still not less than 90% by weight. It is not the case of the customs authorities that the item produced for consideration before the DGFT and subjected to DEBP Committee (inter-ministerial committee) which discussed the components was not the same, which was produced for export. The Committee of Experts in the office of DGFT included the representatives of Ministry of Steel; Joint DGFT Industrial Advisory, Joint Industrial Advisor and DGFT and three other DGFT. The representatives of Department of Steel explained the forging process in general and that the committee opined that the item produced was licensed item falling in the classification Sl.No.530B of the Schedule of DEBP.
21. On the aforesaid discussion, we find from the scheme of the Customs Act, 1962 and the Foreign Trade (Development and Regulation) Act, 1992 that whenever a dispute may arise as to the classification of the goods, other than its description, quantity and FOB value, the customs authorities have to refer the dispute for adjudication to DGFT under Section 13 of the Act. It is only if the DGFT as the licensing and also adjudicating authority decides against the licensee, that the customs authorities will get jurisdiction to confiscate and levy penalty on such goods.
22. The writ petition is allowed. The order of the Commissioner of Customs and Central Excise, Kanpur dated 30.3.2009 is set aside. The Commissioner, Customs and Central Excise is directed to refer the matter with all the material including the report obtained form CRCL to the Director General of Foreign Trade, New Delhi. If the Director General of Foreign Trade finds that goods are not of the classification for which the license was granted for DEBP, he may proceed to take steps in accordance with the Foreign Trade (Development and Regulation) Act, 1992 and it is only thereafter that the customs authorities may invoke the provisions of the Customs Act, 1962.