Custom, Excise & Service Tax Tribunal
Kdl Biotech Ltd vs Commissioner Of Customs (Export ... on 21 July, 2014
IN THE CUSTOMS, EXCISE & SERVICE TAX APPELLATE TRIBUNAL WEST ZONAL BENCH AT MUMBAI COURT NO. I Application Nos. C/MA (Ors)1088 & 1089/12 in Appeal Nos. C/223 & 222/11 & C/S/778 to 791 & C/S/815/11 in Appeal Nos. C/222 to 235/11 & C/249/11 & Appeal Nos. C/222 to 235/11 & C/249/11 (Arising out of Order-in-Original CAO No. 07/2011/CAC/CC/BKS dated 31.01.2011 passed by Commissioner of Customs (Adjudication), Mumbai.) For approval and signature: Honble Mr.S.S. Kang, Vice President Honble Mr. P.K. Jain, Member (Technical) ==========================================================
1. Whether Press Reporters may be allowed to see : No the Order for publication as per Rule 27 of the CESTAT (Procedure) Rules, 1982?
2. Whether it should be released under Rule 27 of the :Yes CESTAT (Procedure) Rules, 1982 for publication in any authoritative report or not?
3. Whether Their Lordships wish to see the fair copy : Seen of the Order?
4. Whether Order is to be circulated to the Departmental : Yes authorities?
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1.KDL Biotech Ltd
2.Unimark Remedies Ltd
3.Nalin Kumar Bamzai
4.Ajit Jain*
5.Mehul J Parekh
6.Yogesh N Parekh
7.Ramesh Agrawal
8.Sapan Chakravorty
9.Rakesh Naval
11.Suresh Mandhana
12.Mahesh M Kaval
13.Anwar Hussain Patel
14.Ms. Aditi Parekh
15.Ms. Reema Shivdasani Appellant (Represented by: Mr. T. Viswanathan, Advocate with Mr. Ratan Jain, C.A. and Mr. V.K. Jain, Advocate*) Vs Commissioner of Customs (Export Promotion), Mumbai Respondent (Represented by: Mr. K.M. Mondal, Special Counsel) CORAM:
Honble Mr.S.S. Kang, Vice President Honble Mr. P.K. Jain, Member (Technical) Date of Hearing : 23.04.2014 Date of Decision: 21 .07.2014 ORDER NO..
Per: P.K. Jain
1. Keeping in view the nature of dispute, it was decided to hear the main appeals themselves. The appellants are manufacturers of bulk drugs such as Ampicillin Trihydrate, Amoxycillin Trihydrate, Cefadroxial Monohydrate etc. For the manufacture of the said bulk drugs, appellants require various inputs such as Pencillin-G, Ethyl Aceto Acetate and various other chemicals. The appellants manufacture the said drugs and are selling the same in the domestic market and also exporting the same. Some of the inputs are procured locally and majority of the inputs are imported. For the manufacture and thereafter export of such bulk drugs various inputs are being imported under Advance Licence Scheme which permits import of such inputs free of Customs duty. Appellant No. 2 was working as supporting manufacturers for Appellant No. 1 and they had strategic alliance and later on control of various activities. In fact, a case was booked against appellant No. 2, which was also heard alongwith this case as many issues are common and hence many of our observations in that case are also reproduced here.
2. Advance Licensing Scheme was introduced with a view to encourage the export and leave the exporter of the duty burden at the time of import of raw material. Thus the Scheme primarily envisaged import of raw material free of Customs duty against specific export order. The term Advance denotes import before export. These materials are expected to be used in the manufacture of goods to be exported against the export order. After few years of the introduction of the Scheme, the Scheme was liberalized wherein it was permitted to manufacture the export products using the raw materials procured domestically and fullfil an export order and import identical raw materials free of Customs duty later on. However such raw materials were not permitted to be disposed of or sold in the domestic market but were required to be used for production of goods and the goods so produced were permitted to be exported or sold in the domestic market after completion of the export obligation etc. It is important to note that at no point of time the Scheme envisaged import of duty free raw material and either sell the same in the domestic market or use the same for production of goods to be sold in the domestic market before completion of the export obligation.
3. Appellants were importing the raw materials under the advance authorizations and were also exporting the goods. However, based upon a specific information, the units and office premises of the appellant No. 1 alongwith that of appellant No. 2 were searched by the officers which lead to discovery of number of irregularities. One of the irregularities was that without completion of the export obligation appellants were using the raw material in the manufacture of the end product but the end product instead of exporting were being sold in the domestic market on a large scale. This gave unfair advantage to the appellant vis-`-vis other manufacturers of similar products for domestic market. Similarly there are other irregularities such as import of higher quantity of raw materials then that actually required and other irregularities. It would be appropriate to discuss the issues with reference to the irregularities found.
4. In the impugned order a demand of Rs. 5,81,87,301/- is confirmed on the ground that during the period October, 2005 to October 2007 the appellants had disposed of a part of the export products, namely 7ACCA, Cefaclor, Cephalexin, 7 ADCA etc made out of raw material Pencillin-G which was imported free of Customs duty under Customs Notification No. 93/2004-Cus dated 10.9.2004 and Notification No. 94/2004-Cus dated 10.09.2004against the Advance Authorizations issued by the DGFT. In the said demand, 4 Advance Authorizations are covered. According to the Revenue, imported raw materials should have been used in the manufacture and thereafter export of goods for fulfilment of export obligation and before fulfilling the export obligation, the goods so produced could not have been cleared to the domestic market. During search operation on 30.08.2007, neither pencillin-G nor the final products (bulk drugs) were found in the manufacturing units even though export obligations were yet to be fulfilled.
5. The learned Advocate for the appellants main contention is that as per Notification No. 93/2002-Cus and No. 94/2004-Cus there is no requirement that the duty free imports alone should be used in the resultant product exported out of India. The learned advocate for the appellant further contended that there are notifications specifically stipulating that the imported duty free inputs alone should be used in discharge of export obligation. However, there is no such stipulation in the earlier mentioned two Notifications. It was also contended that the Legislative history of notification covering the imports under Advance Licensing Scheme also supports the case of the appellant. The learned advocate also relies upon the following case law:
(i) Zincollied (India) Appeal No. C/299, 300 & 301/10-Mum;
(ii) Jay Engineering Works Ltd vs CC 2003 (162) ELT 680 (Tri-Bang);
(iii) Standard Industries Ltd vs CC 2004 (168) ELT 107 (Tri-Mumbai);
(iv) Dolphin Drugs Pvt Ltd vs CC 2000 (115) ELT 552 (Tri);
(v) U-Foam Pvt Ltd vs CC 2003 (154) ELT 633 (Tri-Chennai);
(vi) Vorin Laboratories Ltd vs CC 2004 (168) ELT 107 (Tri-Chennai);
(vii) Jindal Drugs Ltd vs CC 2007 (214) ELT 37 (Tri-Mum);
(viii) Areva T & D India Ltd vs CC 2009 (242) ELT 441 (Tri-Chennai);
(ix) Global Exim vs CC 2010 (253) ELT 417 (Tri-Mum).
6. Another contention of the learned advocate for the appellant was that there is no violation of Para 4.1.3 and 4.1.5 of the Foreign Trade Policy. The learned advocate contended that the term physically incorporated employed in the Policy does not mean that the imported input should be actually used in the resultant product exported out of India. It only means that capital goods and unrelated inputs shall not be allowed as raw materials under the Advance Authorization Scheme. The term physically incorporated in the export product in para 4.1.3 of FTP only implies that the description, quality etc of the inputs which are allowed to be imported under the Advance Authorization Scheme. It does not mean that the imported duty free inputs to be actually used in the manufacture of final products. The learned Advocate also contended that there is no condition in the Notification No. 93/2004-Cus and No. 94/2004-Cus similar to para 4.1.5 of the Policy and there is no condition in these Notifications to the effect that the import has to comply the conditions of Advance Authorization or FTP. Even the Bond executed with the Customs department does not refer to the FTP. The learned Advocate also contended that the Customs department cannot initiate any action by denying the benefit of the two Notifications or imposition of penalty for the so-called violation of para 4.1.5 of the Policy. Another contention of the learned advocate was that there is no violation of the Policy provisions in the clearance of the resultant product in the domestic market before completion of export obligation especially when the manufacturing operations undertaken are in a continuous manner and the segregation of inputs vis-`-vis the final product is not possible or feasible.
7. The learned Special Counsel for the Revenue argued that during the visit of the said unit on 30.8.2007 no stock of Pencillin-G imported free of Customs duty was found. Similarly no stock of any of the export products such as 7ACCA, Cefaclor, Cephalexin monohydrate etc was found. There is no dispute on this factual position. Obviously the Pencillin-G imported by the appellant have been used in the manufacture of such products which had been cleared in the domestic market. This action of the appellant is in clear violation of the provisions of the FTP and the conditions of the aforementioned notifications. In terms of para 4.1.5 of the FTP 2004-09 advance licence and/or materials imported thereunder shall not be transferable even after completion of export obligation. However, the licencee will have the option to dispose of the product manufactured out of the duty free inputs once the export obligation is completed.
8. The learned Special Counsel further argued that admittedly the appellant has disposed of part of the finished export products even before completion of the export obligation which is in clear violation of the provisions of the Foreign Trade Policy. Further the appellant has also failed to fulfil all the conditions of the Notification. This apart, the appellant has also failed to fulfil the conditions of the notifications in full. As per condition (vi) of both the notification, the appellant was required to produce evidence of discharge of export obligation to the satisfaction of the Deputy Commissioner of Customs or Assistant Commissioner of Customs within a period of 30 days of the expiry of period allowed for fulfilment of export obligation or within the extended period allowed by the Deputy Commissioner or Assistant Commissioner of Customs. The appellant has failed to do so. Consequently, benefit of the Notifications has been rightly denied.
9. The learned Special Counsel further contended that it cannot be denied that under Advance Authorisation Scheme, the benefit of Notification is linked with the Advance Authorization. Under the Scheme, the appellants are required to satisfy not only the conditions of the relevant notifications but also conditions of Advance Authorisation issued. Failure to satisfy the conditions of Advance Authorisation will automatically result in denial of benefit of the Notification. In support of his contention, he drew our attention to the condition sheet attached the Advance Authorisation. The condition (vi) in the said sheet clearly states that the exempted goods imported against this authorization shall only be utilized in accordance with the provisions of FTP 2004-09 and the relevant Customs Notification No. 93/2004-Cus dated 10.9.2004 as amended from time to time. Undoubtedly the said conditions has been clearly violated by the appellant as part of the finished export product made out of the Pencillin-G which was imported free of Customs duty has been disposed of in the local market before fulfilling the export obligation and the export obligation was later on fulfilled by using the indegenuous material which is not permissible under the FTP. The learned Special Counsel also argued that in terms of para 4.1.3, Advance Authorisation is issued to allow duty free import of inputs which are physically incorporated in the export product and since the material imported was not physically incorporated in the export product, therefore there is violation of the conditions of Authorisation and hence the Notification.
10. The learned Special Counsel also drew support for his contention from the decision of the Honble Supreme Court in the case of Sheshank Sea Foods Pvt Ltd vs UOI 1996 (88) ELT 626 (SC).
11. We have considered the rival submissions. The dispute here is that the appellant imported Pencillin-G free of Customs duty. During visit to the said unit, no Pencillin-G or goods manufactured from the said Pencillin-G were found in the manufacturing unit. This implied that the goods manufactured out of the said Pencillin-G have been sold in the domestic market. This fact has also not been disputed by the appellant. It is also not under dispute that export obligation was yet to be fulfilled. The main contention of the appellant is that the Customs Notification relating to Advance Authorization do not require that the duty free imports alone should be used in the resultant products exported. We find that the objection of the Revenue is not that the duty free imports alone should be used the resultant product exported. The objection is that before fulfilling export obligation, duty free materials imported cannot be used for manufacture of goods which are sold in the domestic market. There was no objection from the Revenue if the appellant could have fulfilled the export obligation, and thereafter used the imported raw material for manufacture of goods to be sold in the domestic market. In view of this position, the main contention of the appellants holds no substance.
12. Another contention of the appellant is that there is no violation of para 4.1.3 and 4.1.5 of the FTP. The said paras are as under:
4.1.3 An Advance Authorisation is issued to allow duty free import of inputs, which are physically incorporated in the export product (making normal allowance for wastage). In addition, fuel, oil, energy, catalysts etc. which are consumed/utilised in the course of their use to obtain the export product, may also be allowed under the scheme. However the Director General of Foreign Trade, by means of a Public Notice, may exclude any product or products from the purview of Advance Authorisation.
4.1.5 Advance Authorisation and / or materials imported thereunder will be with actual user condition. It will not be transferable even after completion of export obligation. However, Authorisation holder will have option to dispose off product manufactured out of duty free inputs once export obligation is completed.
13. A plane reading of para 4.1.3 would indicate that Advance Authorization is issued to allow duty free imports which are physically incorporated in the export product. Para 4.1.5 further states that Advance Authorization and/or material imported thereunder will be with actual user conditions. It will not be transferable even after completion of the export obligation. However authorization holder will have option to dispose of products manufactured out of duty free inputs once export obligation is completed. There is no dispute about the fact that the Pencillin-G imported was required for the manufacture of export products and would therefore be physically incorporated in the export product. If the said conditions are read with para 4.1.5 this could imply that Pencillin-G is allowed with actual user condition and is not transferable even after the export obligation is completed. This would imply that Pencillin-G is required to be used by the appellant himself in the manufacture of goods. Further, the product manufactured out of duty free inputs can be disposed of only after export obligation is completed. There is no dispute whatsoever that the appellant have sold the product so manufactured in domestic market before export obligation was complete. We are unable to agree with the contention that there is no violation of the FTP in clearing the resultant product in the domestic market before completion of the export obligation. In fact in the present case neither Pencillin-G nor the goods manufactured from the Pencillin-G were found in the factory during the visit to the unit and export obligation in number of such Advance Authorisations were yet to be fulfilled.
14. We have gone through the case law quoted by the learned counsel for the appellant. In the case of Zincollied, export obligation was first completed and thereafter goods manufactured out of duty free material was sold in domestic market.The case of M/s Dophin Drugs Pvt Ltd (supra), was relating to VABAL Scheme covered under Notification No. 203/1992-Cus. In the said case export obligation though not fulfilled during the initial period of export obligation but were fulfilled within the extended period no such condition as discussed in para 13 was envisaged. In the case of U-Foam Pvt Ltd (supra) the export obligation although not fulfilled during the period initially allowed but was fulfilled within the extended period. Here again no such condition as discussed in para 13 was envisaged or discussed. In the case of Vorin Laboratories (supra), there was a fire in the factory and the assessee was forced to sell the goods in the domestic market. In these special circumstances, the Tribunal allowed the appeal. In any case no condition as discussed in para 13 was envisaged. In the case of Standard Industries Ltd (supra), the material imported duty free was utilized in the manufacture of finished product but finished product sold in the domestic market and export obligation completed by utilization of material other than those specifically cleared duty free. Here again, no condition as discussed in para 13 was envisaged. In the case of M/s Jay Engineering Works Ltd (supra) the appellants had fulfilled export obligation and thereafter the appellant was permitted to use the import material for manufacture of other goods. In the case of M/s Galaxy Surfactant Ltd (supra), the appellant imported goods duty free and used in other unit of the same entity and it was held by the Tribunal that the actual user condition is not violated. In the case of M/s Jindal Drugs (supra), the imported material was sold after fulfillment of export obligation and the issue was different. The case of Areva T & P India Ltd (supra), is relating to conversion of free Shipping Bill to DEEC Shipping Bill. Similarly in the case of M/s Global Exim (supra) the issue was relating to whether the imported material should be of same quality, technical characteristics and specification as material used in the resultant product. It would thus be seen that in none of the case law it was held that appellant can sale the goods manufactured out of duty free material before fulfilling the export obligation.
15. A point is made by Revenue that advance authorization is issued to allow duty free import of inputs, physically incorporated in the export product. Learned counsel for appellants, on the other hand, contended that the term physically incorporated employed in the Policy does not mean that the imported input should be actually used in the resultant product exported out of India. We find substance in appellants contention. In our view, term physically incorporated only implies that such items are required for the manufacture and have been used so. It is not necessary that only imported exempt material is incorporated.
16. Another contention of the learned advocate for the appellant is that in the absence of a condition in Notification No. 93/2004-Cus or in Notification 94/2004-Cus to the effect that imported inputs alone should be used in the manufacture of resultant product to be exported or that the inputs should not be used for domestic production prior to fulfillment of export obligation, insisting that export obligation should be completed using the imported inputs alone is not sustainable.
17. As observed earlier, it is not the case of Revenue that export obligation should be completed using the imported inputs alone. Case of Revenue is that appellant cannot use the raw material for domestic production before completion of export obligation. We note that every authorization has a condition sheet attached. In a case of appellant No. 2 where appellant No. 1 is supporting manufacturer, the said sheets reads (this is to be for all advance authorizations) as under:
Notification No. 93/2004-Cus dated 10.9.2004 reads as under:
Notification No 93 /2004-Customs In exercise of the powers conferred by sub-section (1) of section 25 of the Customs Act, 1962 (52 of 1962), the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts materials imported into India against an Advance Licence issued in terms of paragraph 4.1.3 of the Foreign Trade Policy (hereinafter referred to as the said licence) from the whole of the duty of customs leviable thereon which is specified in the First Schedule to the Customs Tariff Act, 1975 (51 of 1975) and from the whole of the additional duty, safeguard duty and anti-dumping duty leviable thereon, respectively, under sections 3, 8 and 9A of the said Customs Tariff Act, subject to the following conditions, namely :-
(i) that the description, value and quantity of materials imported are covered by the said licence and the said licence is produced before the proper officer of customs at the time of clearance for debit;
(ii) that where import takes place after fulfilment of export obligation, the shipping bill number(s) and date(s) and quantity and FOB value of the resultant product are endorsed on the said licence:
Provided that where import takes place before fulfilment of export obligation, the quantity or FOB value of the resultant product to be exported are endorsed on the said licence;
(iii) that the importer at the time of clearance of the imported materials executes a bond with such surety or security and in such form and for such sum as may be specified by the Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, binding himself to pay on demand an amount equal to the duty leviable, but for the exemption contained herein, on the imported materials in respect of which the conditions specified in this notification have not been complied with, together with interest at the rate of fifteen per cent. per annum from the date of clearance of the said materials :
Provided that bond shall not be necessary in respect of imports made after the discharge of export obligation in full;
(iv) that the imports and exports are undertaken through seaports at Mumbai, Kolkata, Cochin, Magdalla, Kakinada, Kandla Mangalore, Marmagoa, Chennai, Nhava Sheva, Paradeep, Pipavav, Sikka, Tuticorin, Visakhapatnam, Dahej, Mundhra, Nagapattinam, Okha, Jamnagar and Muldwarka or through any of the airports at Ahmedabad, Bangalore, Bhubaneswar, Mumbai, Kolkata, Coimbatore, Delhi, Hyderabad, Jaipur, Chennai, Srinagar, Trivandrum, Varanasi, Nagpur and Cochin or through any of the Inland Container Depots at Agra, Bangalore, Coimbatore, Delhi, Faridabad, Gauhati, Guntur, Hyderabad, Jaipur, Jallandhar, Kanpur, Ludhiana, Moradabad, Nagpur, Pimpri (Pune), Pitampur (Indore), Surat, Tirupur, Varanasi, Nasik, Rudrapur (Nainital), Dighi (Pune), Vadodara, Daulatabad (Wanjarwadi and Maliwada), Waluj (Aurangabad), Anaparthy (Andhra Pradesh), Salem, Malanpur, Singanalur, Jodhpur, Kota, Udaipur, Ahmedabad, Bhiwadi, Madurai, Bhilwara, Pondicherry, Garhi Harsaru, Bhatinda, Dappar (Dera Bassi), Chheharata (Amritsar), Karur, Miraj, Rewari, Bhusawal, Jamshedpur, Surajpur and Dadri or through the Land Customs Station at Ranaghat, Singhabad, Raxaul, Jogbani, Nautanva (Sonauli), Petrapole and Mahadipur.
Provided that the Commissioner of Customs may, by special order, or by a Public Notice, and subject to such conditions as may be specified by him, permits import and export from any other seaport/airport/inland container depot or through any land customs station;
(v) that the export obligation as specified in the said licence (both in value and quantity terms) is discharged within the period specified in the said licence or within such extended period as may be granted by the Licensing Authority by exporting resultant products, manufactured in India which are specified in the said licence and in respect of which facility under rule 18 or sub-rule (2) of 19 of the Central Excise Rules, 2002 has not been availed :
Provided that an Advance Intermediate Licence holder shall discharge export obligation by supplying the resultant products to ultimate exporter in terms of Paragraph 4.1.3 (b) of the Foreign Trade Policy;
(vi) that the importer produces evidence of discharge of export obligation to the satisfaction of the Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, within a period of 30 days of the expiry of period allowed for fulfilment of export obligation, or within such extended period as the said Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, may allow;
(vii) that the said licence and the materials shall not be transferred or sold;
(viii) that in relation to the said licence issued to a merchant exporter,-
(a) the name and address of the supporting manufacturer is specified in the said licence and the bond required to be executed by the importer in terms of condition (iii) 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 utilised in the factory of such supporting manufacturer for discharge of export obligation and the same shall not be transferred or sold or used for any other purpose by the said merchant exporter.
2. Where the materials are found defective or unfit for use, the said materials may be re-exported back to the foreign supplier within three years from the date of payment of duty on the importation thereof:
Provided that at the time of re-export the materials are identified to the satisfaction of the Deputy Commissioner of Customs or Assistant Commissioner of Customs, as the case may be, as the materials which were imported.
Explanation . For the purposes of this notification,-
(i) Foreign Trade Policy means the Foreign Trade Policy 2004-2009 published vide notification of the Government of India in the Ministry of Commerce and Industry, No.1/2004 dated the 31st August, 2004 :
(ii) Licensing Authority means the Director General of Foreign Trade appointed under section 6 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992) or an officer authorized by him to grant a licence under the said Act;
(iii) Materials means -
(a) raw materials, components, intermediates, consumables, catalysts and parts which are required for manufacture of resultant product;
(b) mandatory spares within a value limit of ten per cent. of the value of the licence which are required to be exported alongwith the resultant product;
(c) fuel required for manufacture of resultant product; and
(d) packaging materials required for packing of resultant product;
(iv) manufacture has the same meaning as assigned to it in paragraph 9.37 of the Foreign Trade Policy.
Thus it is clear from the condition sheet attached to the Advance Authorisation that exempt material is requited to be utilized in accordance with the provision of Export Import Policy and relevant Customs Notification. Even the opening paragraph of the Customs Notifications stipulates that material is exempted when imported in India, against an Advance Authorisation in terms of paras 4.1.3 of the Foreign Trade Policy. Thus, all the conditions of FTP are applicable for grant of duty free import.
18. We also note that the Honble apex court in the case M/s Sushank Sea Foods Pvt Ltd vs UOI (supra) has held as under:
8. Section 111 (o) is the sheet-anchor of the respondents' case. It reads thus:
"111. Confiscation of improperly imported goods. etc. The following goods brought from a place outside India shall be liable to confiscation -
XXX XXX XXX
(o) any goods exempted, subject to any condition, from duty or any prohibition in respect of the import thereof under this Act or any other law for the time being in force, in respect of which the condition is not observed unless the non-observance of the condition was sanctioned by the proper officer."
9. Section 111 (o) states that when goods are exempted from Customs duty subject to a condition and the condition is not observed, the goods are liable to confiscation. The case of the respondents is that the goods imported by the appellants, which availed of the said exemption subject to the condition that they would not be sold, loaned, transferred or disposed of in any other manner, had been disposed of by the appellants. The Customs authorities, therefore, clearly had the power to take action under the provisions of Section 111 (o).
10. We do not find in the provisions of the Import and Export Policy or the Hand Book of Procedures issued by the Ministry of Commerce, Government of India, anything that even remotely suggests that the aforesaid power of the Customs authorities had been taken away or abridged or that an investigation into such alleged breach could be conducted only by the licensing authority. That the licensing authority is empowered conduct such an investigation does not by itself preclude the Customs authorities from doing so.
11. The communication of the Central Board of Excise and Customs dated 13th May, 1969, refers to the breach of the condition of a license and suggests that it may not be possible to take action under Section 111 (o) in respect thereof. It is true that the terms or the said Exemption Notification were made part of the appellants' licences and, in that sense, a breach of the terms of the said Exemption Notification is also a breach of the terms of the license, entitling the licensing authority to investigate. But the breach is not only of the terms of the license; it is also a breach of the condition in the Exemption Notification upon which the appellants obtained exemption from payment of Customs duty and, therefore, the terms of Section 111 (o) enable the Customs authorities to investigate.
19. In view of the above analysis, we hold that demand is correctly made and dismiss the appeal on the said issue.
20. The second issue in the present case is relating to demand of Rs. 19,13,968/- as detailed in Annexure B of the demand notice on the ground that the appellant had made excess import of duty free materials on the basis of self declared norms in respect of 11 Advance Authorisations. The norms fixed by DGFT were lower than self declared norms. The appellant failed to meet the export obligation on the excess imports. Instead the appellant disposed of the finished goods out of the excess duty free materials in the local market in contravention of the conditions of the Advance Authorisations read with the relevant notifications.
21. During the hearing the learned advocate for the appellant did not press for this issue and stated that they have already paid duty alongwith interest, hence there cannot be any penalty on the appellants.
22. The third issue in the present case is relating to demand of Rs. 2,80,07,763/- as detailed in Annexure C of the demand notice on the ground that the raw material actually required for manufacture of the resultant product viz Amoxicillin Trihydrate is far lower than the norms specified in SION and consequently excess exempt raw material imported is liable to pay duty. The said demand pertains to 5 Advance Authorisations which were issued based on norms specified in SION published by DGFT. However, it was found that the actual consumption of the various duty free raw materials, in the manufacture of the resultant export product Amoxicillin Trihydrate was far less than the SION fixed by the licensing authority and imported free of customs duty. The excess raw material was used in the manufacture of goods which were sold in the domestic market which is in violation of the provisions of para 4.28 (v) of the Hand Book of Procedure 2004-09.
23. The main contention of the learned counsel for the appellant is that the provisions relating to advance authorization in the Foreign Trade Policy or Customs Notifications do not bar the authorization holder from using the surplus quantity of the inputs for the manufacture of resultant product cleared in DTA.
24 The learned counsel for the appellants contention was that the advance authorizations were issued based on the Standard Input Output Norms or on the basis of self-declared norms as per para 4.7 of the Handbook subject to ratification by the Norms Committee in the DGFT. His main contention was that the quantity as given in the advance authorization is statutorily treated as required for the manufacture of the resultant product and therefore the fact that they have used less quantity than the quantity specified in the Advance Authorisation is of no consequence. The materials so saved can be used by them for any purpose subject to actual user condition. The learned counsel also stated that they have invested various resources in the R & D Centre and this has resulted in improving the yield of the existing product manufactured by them and the Revenue cannot deny benefit of such R & D. The learned counsel also stated that there may be some manufacturers who may require more inputs then the one specified in the SION but in such cases the benefit is limited to the SION. Hence in the cases where the raw material consumed is less than the benefit has to go to the authorization holder. The learned counsel also stated that similar situation arises in the case of all industry rate of drawback. Even when an exporter does not use any imported raw material, he is entitled to get all industry rates. This has been clarified by the Board number of times and he placed reliance on the decision of the Honble Supreme Court in the case of Chemical & Fibres of India Ltd reported in 1991 (54) ELT 3 (SC). The learned counsel further stated that para 4.28 (v) of the Hand Book of Procedure does not advance the case of the department and even if it does, it is contrary to the Policy and the Customs Notification. His main contention was that the Hand Book of Procedure cannot restrict the scope of the Policy. As the Hand Book of Procedure is issued by the DGFT while the Import Policy is formulated and notified by the Government of India under Section 5 of the Foreign Trade (Development and Regulations) Act, 1992. He also relied upon the decision of Honble Bombay High Court in Narendra Udesh vs UOI reported in 2003 (156) ELT 819 (Bom).
25. The learned special counsel for the Revenue, on the other hand, quoted the provisions of para 4.28 (v) of the Hand Book of Procedure which states as under:
in case it is found that Authorisation holder has consumed lesser quantity of inputs than imported, Authorisation holder shall be liable to pay customs duty on unutilized value of imported material, alongwith interest thereon as notified, or effect additional export within the EO period. The learned special counsel argued that the appellant has failed to comply with the said provisions and had neither paid duty on the unutilized value of the imported material, nor has it affected any additional export, and have suppressed the lesser utilization of the material, and for this purpose the appellant has not maintained the prescribed register in Appendix 23 which is in violation of the condition of the Advance Authorisation. The learned special counsel also stated that in the Advance Authorisation cited earlier, condition (7) clearly states that the Authorisation holder shall maintain a true and proper account of consumption and utilization of imported goods in the proforma given Appendix 18 of the Handbook Volume 2004-09. Similar provisions exist in the Policy of 2009-14. Since there is a violation of condition of advance authorisation, there is violation of condition of Exemption Notifications under the Advance Licensing Authorisation and therefore the demand is correctly made.
26. The learned counsel also stated that the Handbook is a part and parcel of the Foreign Trade Policy and Foreign Trade Policy makes reference of the said Handbook at number of places and the Handbook very clearly stipulates that exempt raw material will be used either for the additional export or duty will be paid. The learned counsel also stated that the example given relating to drawback is totally misplaced. All Industry Rate of Drawback are fixed keeping in view the position in the particular industry in the whole country and such rates are, in most of the cases, on the lower side and the exporters are free to approach the authorities for fixation of brand rate. In the case of SION the normal norms are liberal and it is in view of the liberal norms that a provision has been made that in case the raw material consumed is less than what is prescribed under SION than authorization holder is required to either make additional exports or pay Customs duty on the excess material.
27. We have considered the submissions. There is no dispute that the raw material imported was far in excess of that required by the appellant. This fact was not brought to the notice of the licensing authorities so that they could have issued the licence as per the actual requirement. Even after duty free importation, the appellants have neither made additional exports, nor paid the Customs duty. These details were suppressed and came to light during investigation. Accordingly, we hold that there is a violation of the provisions of Handbook read with Foreign Trade Policy and since the exemption is granted to raw materials imported against Advance Authorisation issued in terms of Foreign Trade Policy, the exemption is subject to limitation as provided in the Notification, Foreign Trade Policy/Handbook of Procedures. We are not impressed with the argument of the learned counsel for the appellants that the said provision tries to restrict the provisions of the Foreign Trade Policy. In our view, it only clarifies the position relating to SION. It is not practically possible to precisely point out the exact input-output required which would be applicable for all manufacturers. Moreover such norms are based upon the feed back from the Trade Association which would normally be in the worst scenario. Foreign Trade Policy does not state that licence holder can use the surplus raw material imported duty free for own use. On the contrary, Handbook clarifies that duty is to be paid or additional export obligation to be fulfilled. We also note that advance authorization are issued based upon Adhoc Norms or self declared norms in terms of Handbook only. When Handbook authorizes use of adhoc norms or self declared norms, we do not see any rationale in questioning that Handbook is trying to restrict the Policy. Example of All Industry Drawback Rate is not at all comparable to the SION. There is no correlation under the All Industry Drawback Rate with the actual consumption of material or the duty incident thereon. Rates are based on All India estimates (and not based upon actual export orders and manufacturing process). Advance Licence Scheme is altogether a different scheme. Here the basic idea is of permitting import of duty free raw materials actually required for the production of an export order and use the same for the said purpose.
28. The fourth issue is relating to demand of Rs. 49,364/- on the ground of shortfall in fulfilling the export obligation. During the argument the learned advocate for the appellant stated that the said demand pertains to two Advance Authorisations and they are accepting the liability and in fact they have already paid the duty alongwith applicable interest. He further stated that in view of this position, no penalty is imposable on the appellant.
29. In view of the accepted liability this requires no further examination. As far as penalty is concerned, that will be dealt with later.
30. The fifth issue is relating to demand of duty of Rs. 96,60,662/- as per Annexure E to the Show Cause Notice. The said payment has been confirmed on the ground of undervaluation of Pencillin-G imported either on payment of duty or free of duty under Advance Authorisation. Appellant No. 2 was importing Pencillin-G and were selling to appellant No. 1 on high-sea basis. Appellant No. 1 was declaring the price based upon the import price of appellant No. 2 plus nominal commission. However, on investigation, it was found that Appellant No. 1 was selling Pencillin-G on the prevailing price in international market on the date of high-sea sale. Investigation revealed that in addition to the amount declared at the time of clearance appellant No. 2 has raised debit note for the additional amounts. Departments contention is that assessable value will be the total value i.e. declared at the time of clearance plus the amount of debit notes raised. The learned advocate for the appellant stated that in view of the Honble Supreme Courts decision in the case of Ispat Industries reported in 2006 (202) ELT 561 (SC) one has to see the value of goods not for each specific transaction, but the ordinary value at which it would have been sold in the course of international trade at the time of its import. The learned advocate further stated that for debiting the value in the Advance Authorisation the price paid by URL to the foreign supplier alone is relevant. Therefore even if URL has raised debit note on the appellant for the price over and above the invoice price that is irrelevant. He further stated that for debiting the licence, the decision of the Honble Bombay High Court in UOI vs Glaxo Laboratories (India) Ltd is relevant wherein it was held that only the CIF value would be relevant.
31. The learned special counsel for the Revenue, on the other hand, stated that it is well settled that in a high-sea sale transaction the actual transaction value will be the price finally paid to the high seas seller by the buyer for purpose of assessment of goods to duty as held by the Larger Bench of the Tribunal in the case of Eternit Everest Ltd vs CC, Bombay reported in 2000 (119) ELT 716 (Tri-LB) which has been relied upon by the Tribunal in Excel Glasses Ltd vs CC, Trichy reported in 2004 (166) ELT 496.
32. The learned special counsel further stated that duty has to be paid on the undeclared excess value of the goods. He also quoted the judgment of the Honble Calcutta High Court in Manjushree Minerals Ltd vs CC reported in 1993 (68) ELT 273 (Cal) in this regard.
33. We have considered the rival submissions. There is no dispute about the fact that appellant No. 1 has paid substantial amount to appellant No. 2 in respect of goods purchased from appellant No. 2 on high-sea sale basis. As per Section 14 of the Customs Act, 1962 it is the transaction value which is relevant for determining the assessable value. In the present case, the transaction value will include the amount so debited or paid after the clearance of the goods. In view of this position, we hold that the additional amount paid will be subject to duty.
34. The learned advocate for the appellant has stated that for debiting the licence, in view of the Honble Bombay High Court judgment in the case of UOI vs Glaxo Laboratories (India) Ltd only the CIF value is to be taken into account.
35. First of all, we find that the said decision is pertaining to import licence wherein certain imports were permitted subject to quantity and value restriction. Importers were required to paid normal duty on the assessable value as per the Customs Act, 1962. In the case on hand debiting is relating to advance authorization and not to normal import licence (where duty is required to be paid). The said authorization in fact permits duty free import of specified goods. The quantity as also the value of such goods is specified. Since the quantity and value is with reference to duty free goods the quantity and value to be debited in such advance authorization is required to be as per Section 14 of the Customs Act, 1962. Under the circumstances, in our view the said judgment of the Honble Bombay High Court is not applicable to the facts of present case.
35. The impugned order also confiscates the goods under Section 111 (d) and (o) of the Customs Act, 1962 and imposed fine and penalties. The case of the Revenue is that the duty free materials meant for manufacture of the resultant export product were used for manufacture of sale of finished goods in the domestic market whereby they have contravened the provisions of Section 111 (d) and Section 111 (o) of the Customs Act, 1962 and the goods are therefore liable to confiscation for violation of post importation condition.
36. The learned advocate for the appellants stated that the impugned order invoked Section 111 (d) and Section 111 (o) for purpose of confiscating the exported goods on the ground that the appellants have violated condition No. (vii) of Notification No. 93/2004-Cus. The said condition provides that the materials imported against Advance Authorisations shall not be sold or transferred. He further submitted that Section 111 (d) of the Customs Act, 1962 is applicable only when the goods are otherwise prohibited or restricted for import. The goods are freely importable and hence the provisions of Section 111 (d) of the Customs Act, 1962 is not invocable. Further Section 111 (o) of the Customs Act, 1962 is applicable only when condition of an exemption notification is violated and they have not violated any condition of Notification No. 93/2004-Cus or 94/2004-Cus. In view of this position, the goods are not liable to confiscation and no penalty is imposable. The learned counsel for the appellant also quoted Larger Bench decision in Shiv Kripa Ispat Pvt Ltd vs CCE & C reported in 2009 (235) ELT 623 (Tri-LB) and similar view has been taken by the Honble Bombay High Court in the case of CC (I), Mumbai vs Finesse Creation Inc reported in 2009 (248) ELT 122 (Bom).
37. The learned advocate for the appellant submitted that in view of this position, the goods are not liable to confiscation under Section 111 (d) and (o) of the Customs Act, 1962 and no penalty under Section 112 ibid is imposable. He also argued that no penalty under Section 114A of the Customs Act, 1962 could be imposed on any of the appellant.
38. The learned special counsel for the Revenue stated that the goods are rightly confiscated under Section 111 (o) of the Customs Act, 1962 as the post importation conditions are violated and quoted the Honble Supreme Court in the case of Sheshank Sea Foods Pvt Ltd (supra). The learned Special Counsel also stated that the redemption fine in lieu of confiscation of goods is available in view of the Honble Supreme Courts decision in the case of Weston Components Ltd vs CC reported in 2000 (115) ELT 278 (SC) wherein the Honble Supreme Court held that redemption fine is imposable even after release of goods on execution of bond. In the present case the appellant had executed bond at the time of clearance of the goods. The learned special counsel for the Revenue also stated that this is a case of gross misuse of Advance Authorisation Scheme covering loss of revenue. From the facts of the case, it is quite evident that the appellant had deliberately disposed of part of the finished goods in the domestic market before fullfilment of export obligation. Moreover, appellants obtained raw material more than their requirement on the basis of adhoc/self declared norms or SION. In view of these facts, penalties are justified on the main appellant as also other individuals who aided and abetted in the evasion of duties.
39. We have considered the rival submissions. We note that goods are confiscated both under Section 111 (d) and Section 111 (o) of the Customs Act, 1962. We do not find any force in the argument of learned advocate for the appellant that goods are freely importable and hence there is no restriction for imports and Section 111 (d) is applicable only when the imported goods are prohibited. It may be true that goods are freely importable. However, in that situation full Customs duty is chargeable. Moreover, appellants have not imported the goods under the said provision of free importability. Appellants have imported the goods under Advance Authorisation which have its own benefits and obligations, restriction and prohibitions. Both benefits and obligations, restrictions and prohibitions are interlinked. Appellants cannot be permitted to avail the benefits and when it comes to obligations, restrictions and prohibition to say that goods are freely importable. We therefore hold that confiscation under Section 111 (d) is correct. As far as confiscation under Section 111 (o) is concerned, we find that imported duty free material were meant for manufacture of the resultant product and export, thereby contravening the provisions of relevant notifications and condition of the Advance Advance Authorisation. Section 111 (o) reads as under:
Section 111 (o): any goods exempted, subject to any condition, from duty or any prohibition in respect of the import thereof under this Act or any other law for the time being in force, in respect of which the condition is not observed unless the non-observance of the condition was sanctioned by the proper officer. As held by the Honble Supreme Court in the case of Sheshak See Foods Pvt Ltd (supra), Section 111 (o) is violated and goods are confiscable under Section 111 (o) of the Customs Act, 1962. Learned advocate has quoted the Larger Bench decision in the case of Shivkrupa Ispat Pvt Ltd vs CC reported in 2009 (235) ELT 623 (Tri-LB) and Honble Bombay High Court in the case of Finesse Creation Inc. & Rishi Ship Breakers for advancing that no redemption fine is imposable. Learned Special Counsel, on the other hand, had quoted Honble Supreme Courts judgment in the case of Weston Components Ltd vs CC, New Delhi reported in 2000 (115) ELT 278 (SC) holding that redemption fine is imposable even after release of goods on execution of bond. In this case, undoubtedly goods were released on execution of bond. Cases quoted by learned advocate for appellants are in different circumstances and are not applicable to the facts of the case. We therefore hold that confiscation under Section 111 (d) and Section 111 (o) of the Customs Act, 1962 is correct and redemption fine is also correctly imposed. In addition, Section 111 (m) will be applicable in case of undervalued Pencillin-G and is accordingly upheld.
40. Penalty has been imposed on Appellant No. 1 under Section 114A of the Customs Act, 1962. The main argument of the appellant is that there is no diversion of imported inputs and entire dispute revolves around interpretation and hence no penalty is imposable. Another contention is that case is relating to violation of condition of Notification No. 93/2004-Cus or No. 94/2004-Cus, the demand of duty is not in terms of Section 28 of the Customs Act and hence no penalty can be imposed under Section 114A. It is also contended that individuals/employees have not abetted in the non payment of duty by the appellant. Non fulfilment of export obligation cannot be a reason to impose penalty on individuals. We note that the raw material was diverted for production of goods which in turn were cleared in domestic market before fulfilment of export obligation, input-output norms were misdeclared as also in other cases where raw material consumption was far lower than imported, these facts were suppressed and no duty on excess raw material was paid. The value of the goods purchased on the high-sea sale were misdeclared etc. We have already upheld that the goods have been correctly confiscated under Section 111 (d), Section 111 (m) and Section 111 (o) of the Customs Act, 1962. The various acts clearly indicate mala fide intention to evade the duty and therefore in our view the penalty under Section 114A is correctly imposed on appellant No. 1.
41. In the case of Appellant No. 2, primarily Appellant No. 2 took over the administration of Appellant No. 1. They were controlling the supply of raw materials to Appellant No. 1 and the goods so manufactured were also being diverted as per their direction. They helped appellant No. 1 in under declaring the value of goods sold on the high-sea basis. Thus Appellant No. 2 had in relation to the goods under question has done various acts which has led to confiscation under various sub-sections of Section 111 and therefore they are liable to penalty under Section 112 (a). We therefore accordingly uphold the penalty under the said Section.
42. Appellant No. 3 was the Managing Director of Appellant No. 1. He was controlling the day today affairs. He alongwith Mr. Mehul Parekh, Managing Director of Appellant No. 2 had planned and implemented the strategic alliance which led to gross misuse of the Advance Authorities Scheme as discussed in different paragraphs earlier. In view of these acts, Appellant No. 3 is also liable to penalty under Section 112 (a) of the Customs Act, 1962. The penalty imposed on him is upheld.
43. Appellant No. 4 was the Director Finance and Commercial with Appellant No. 1. The main contention here is that he has left the organization in December 2005 and with effect from May 2005 the control of Appellant No. 1 had been passed on to Appellant No. 2 and the officials working were directly reporting to the Heads of various sections in Appellant No. 2. From June 2005 onwards appellants role was confined to handling settlement with Banks and Financial Institutions. We find from the various annexures to the Show Cause Notice that a number of Authorisations have been obtained after May 2005/December 2005. For example, all the authorizations as per Annexure A are of 2007. Similarly all authorizations in Annexure B are of December 2005 onwards. All authorizations in Annexure C are of May 2005 onwards. Obviously these irregularities had not happened when he was there. Similarly we find irregularities in Annexures D and E all happened in 2007 when he was not there. In view of the above, we find force in the contention of appellant and accordingly set aside the penalties imposed.
44. Appellant No. 5 is the Executive Director of Appellant No. 2 and was overall responsible for the gross misuse of the DEEC Scheme as discussed in the earlier paragraphs. He had the strategic alliance with Appellant No. 1 and he adopted the same modus operandi which he was following in his own company. He was controlling the Appellant No. 1. The penalty imposed on him is upheld.
45. Similar is the position in respect of Appellant No. 6 who was looking after the Finance, Accounts and Strategy. The various diversion of the goods, undervaluation etc has been done under his directions and supervision. The penalty imposed is also upheld.
46. Appellant No. 7 was the Vice President Operations of Appellant No. 1. He was in-charge of the factory including the storage of imported goods, delivery of manufactured goods etc. He failed to carry out his activity in line with the provisions of duty-free import scheme which led to confiscation under Sections 111 (d), (m) and (o) of the Customs Act, 1962 and is therefore liable to penalty. However, keeping in view his role and status in the organization, we reduce the penalty on appellant No. 7 to Rs. 10.00 lakhs.
47. Similarly appellant No. 8 was Vice PresidentAccounts and Commercial in Appellant No. 1. The reasons for imposing penalties are upheld. However, the penalty amount is reduced to Rs. 5.00 lakhs, keeping in view his role and status in the organization.
48. Appellant No. 9 was the general ManagerFinance of Appellant No. 1. He was aware of the Advance Authorisation Scheme and the diversion of the manufactured goods. Keeping in view his status and role the penalty imposed on him is reduced to Rs. 5 lakhs.
49. Appellant No. 10 Was the Chief Financial Officer in Appellant No. 2. He was fully aware of the debit notes relating to high-sea sales. Without his active help, under valuation of high seas sold goods would have not taken place. Thus he was aware of the Advance Licensing matter and under valuation. However, keeping in view the status and the role the penalty is reduced to Rs. 5.00 lakhs.
50. Similarly, Appellant No. 11 was the General Manager Supply Chain of Appellant No. 2 and was fully involved in the diversion of the goods without fulfilling the export obligation. However, keeping in view his status and role in diversion of goods etc, the penalty is reduced to Rs. 15 lakhs.
51. Similarly, appellant No. 12 was the Associated Director International Marketing of Appellant No. 2. It is stated that various delivery advises were as per his direction from different factories. However, it is not coming out from investigation that he helped in diversion of goods etc. We therefore set aside the penalty imposed.
52. Appellant No. 13 was General Manager Logistics and was fully involved in gross misdeclaration of input-output norms. However, keeping in view the status and the role in diversion of goods and hence duty evasion, the penalty is reduced to Rs. 15 lakhs.
53. Appellant No. 14 was the Associated Director of Appellant No. 2 and Director of M/s Glade Organics. Investigations have not brought out any role in the evasion of duty. We therefore set aside the penalty.
54. Similarly in case of Appellant No. 15 the penalty is reduced to Rs. 15 lakhs only, in view of his role, status in the organization and activities relating to diversion of goods & hence duty evasion.
55. All the appeals, (except appellant Nos. 4, 12 and 14) are dismissed except the modification of penalty amounts as above. Appeals in respect of appellant Nos 4, 12 and 14 are allowed.
(Pronounced in Court on 21.07.2014.) (S.S. Kang) Vice President (P.K. Jain) Member (Technical) rk 36