Customs, Excise and Gold Tribunal - Bangalore
Lucky Exports vs Commissioner Of Customs on 10 January, 2003
Equivalent citations: 2003(153)ELT589(TRI-BANG)
ORDER S.S. Sekhon, Member (T)
1. M/s. Lucky Exports, New Delhi (hereinafter referred to as M/s LEND), a Partnership firm, is engaged in the export of medicines, engineering goods, medical equipment and agro products. As a Government recognized Export House, they execute export orders mainly to Russia. The present dispute is with reference to the supply of ventilators to the Ministry of Defence of the Russian Government. The Ministry of Defence of the Government of Russia entered into a contract with the Appellants for the supply of 255 numbers of Complete Electronic Ventilation System to be used as life-saving devices in the hospitals in Russia under the Ministry of Defence. The Appellants in turn entered into a contract with M/s. NOVO LLC, USA for the supply of equipments relating to the ventilators. They also placed purchase orders on M/s. Erkadi International in Bangalore for the supply of items like graphic monitors, cart/trolley, LCD displays etc.
2. Pursuant to an agreement entered into with Ministry of Defence, Govt. of Russia, the Appellants filed an application to the DGFT for the grant of an Advance Licence for the import of certain components. In the application, the Appellants indicated, that the export was not in freely convertible currency. They further provided a flowchart giving different processes that would be undertaken by them on the components supplied before export. They also provided catalogues of the equipments. M/s. Arden Mechatronics were shown as the supporting manufacturer.
3. A licence was issued to M/s. LEND with an export obligation of Rs. 55 crores and restricting imports to the extent of CIF value of 16.29 crores as against 32.59 crores made in the application, with the condition that the technical specification of the components imported should conform to those utilized in the manufacture of the resultant product and should be reflected in the export documents.
4. The first consignment was imported and allowed to be cleared and they were said to be subjected to a process of assembly, testing and calibration in the premises of M/s. Erkadi International under the supervision of Shri Gopinath of M/s. Ardent Mechatronics. The second applicant (hereinafter referred to as Murthy). The complete Ventilator Systems were exported in December 2000.
5. The second consignment of parts and components were imported. However the same were not allowed and seized as the Directorate of Revenue Intelligence wanted to conduct certain enquiries. They were provisionally released and were subjected to process of assembly, calibration and integration with the help of another supporting manufacturer viz., M/s. General Medical Equipment, (hereinafter referred to as M/s. GME) Noida. Thereafter the manufacture of goods were certified by Central Excise authorities to have utilised the items imported. The goods were allowed to be exported. The Officers of DRI subjected this export consignment to complete examination and on being satisfied that the goods were permissible for export permitted the export.
6. In the above factual backdrop, a show cause notice dated 31-7-2001 Was issued alleging that the assembly and testing undertaken on the goods imported was not adequate to constitute manufacture. It was done only to substantiate the value addition declared to the licencing authority; that a comparison of the packing list of the imported goods and of the export goods reveals that but for the addition of the locally purchased items, the goods imported were dispatched as such in their original packing which reveals that no manufacture was done to enhance the intrinsic value of the goods imported. The show cause notice also alleged that the Appellant had intentionally misrepresented/made untrue declaration to the JDGFT that M/s. Ardent Mechatronics was the supporting manufacturer even though no manufacturing activity was carried out by the said unit.
7. The Commissioner after considering the enquiries found.....
(a) No machinery or any special machines/tools were found for the manufacture of Electronic Ventilation System to be exported to Russia when the officers searched the premises of M/s. Ardent Mechatronics, the declared supporting manufacturer. The premises declared was found to be a residential premises of one Shri H.R. Gopinath and further statements and enquiries made reveal that the subject firm was declared as a supporting manufacturer by the partner of M/s. LEND with a view to obtain the Advance Licence under DEEC Scheme and to import Ventilators without payment of duty. Intentionally facts were misrepresented with untrue declaration in an application to JDGFT; as a result of the same advance licence was got issued for the special imports. Shri H.R. Gopinath, partner of M/s. Ardent Mechatronics willingly and knowingly lent the name of his firm and thereafter it was considered that he lent his name to M/s. LEND to wrongly avail the benefit under Advance Licence (DEEC Scheme) which rendered him liable for penalty under Section 112A of the Customs Act.
(b) An examination of the import document reports proved beyond doubt that the goods imported were of USA/New Zealand origin manufactured by an UK firm and M/s. NOVO LLC USA were authorized agents for this UK firm in the manufacture of "Puritan Bennet NPB 760 Ventilators".
(c) Therefore, the Commissioner found that the point for consideration was whether the "Complete Electronic Ventilator System" had been manufactured by M/s. LEND or not in the facts of this case and examining the EXIM Policy definition of 'manufacture' and the application submitted to DGFT, and the records of the export documents, shipping bills etc., and the packing list, he came to a conclusion that -
"....... It is seen that but for the addition of the locally purchased display monitors and minor accessories, the goods imported were dispatched as such in their original packing and the locally purchased goods were packed separately and exported. Therefore, it is proved beyond doubt that no manufacture as defined in the EXIM Policy had taken place inasmuch as no new product having a distinctive name, character or use emerged. Further, as no manufacture was done to enhance the intrinsic value of the goods imported and the same were exported to Russia, there was a huge loss of foreign exchange and loss of customs duty on account of fraudulent import using DEEC licence Scheme.............."
And thereafter relying upon the decision of the M/s. Sharp Business Machines (P) Ltd., 1990 (49) E.L.T 640 (S.C.) held that the Company had attempted to violate the import policy itself as they had imported parts and components for complete system and he found that.......
".....imported Parts and components for "Complete Electronic Ventilation System" which had been admitted. However, it is seen from the records that they had imported NP 1 Nucor Bennet 760 Ventilators as per the Contract, fully manufactured and tested at the place of manufacture and the same has been imported by them in CKD condition by declaring the individual part no of the entire system under DEEC scheme and exported the same to Russia without any manufacturing activity......."
And this was not permissible under the EXIM Policy. In para 127 he held as follows :
"The above said policy provides for export of goods against payment in Indian rupees subject to minimum value addition of 33% with conditions specified thereunder as it is implicit that the value addition has to be achieved by subjecting the imported goods or input to some measure of tangible processing or manufacturing process so as to add to its intrinsic value in a realistic manner. I find that in this case there is only an increase of FOB value of exportable goods on paper without any increase in the intrinsic value which was against the policy."
And thereafter on perusal of Bank Documents, he concluded that it was clearly evident that a letter of credit was established well after the deadline fixed. That the imported goods have not undergone any manufacture or process by the supporting manufacturer and as admitted by the partners of M/s. LEND the supporting manufacturer had no role whatsoever to play in the manufacture of export products and therefore it was established that the goods imported were subsequently exported without any intrinsic value addition and merely FOB value of goods were jacked up to meet the EXIM Policy requirements.
(d) He also found as follows.........
"Further, J find that the Noticees have misrepresented the fact about the quantum of value addition by including the highly inflated value of software loaded to the EPROMS. This is clearly evident from the fact that the total value of the contract with M/s. Erkadi International/M/s. Moola Technologies is about Rs. 1.75 crores, towards the supply of accessories which included the graphic display monitor, in which the software was loaded. However, the value of such software in the declaration made to JDGFT, at the time of obtaining licence was shown at Rs. 1.66 crores for software alone. For the said reason, the value addition of 68.71% declared to the DGFT is only on paper and in fact, there has been no intrinsic value addition as is required under the DEEC Advance Licence and Rupee Rouble, Trade. I also find that no software is loaded on to the EPROM in India and the software has already been loaded on to the EPROMS from the supplier as admitted by Shri K.Y. Ashok Murthy of M/s. Erkadi International that the display unit supplied by him to the noticee contained EPROM was already loaded with software and fixed in the motherboard of the said display unit and that there is no separate 'software otherwise sold by him (Shri K.Y. Ashok Murthy). I also find that the noticee has claimed to have embarked on manufacturing and assembling crores worth of rupees of life-saving medical equipment on the basis of the certificate of provisional registration as a tiny unit which the so called supporting manufacturer M/s. Ardent Mechatronics, Bangalore had at the time of obtaining DEEC Licence for JDGFT. Further, without apprising himself of the infrastructure, sophisticated machinery, skilled and technical manpower required for such manufacture, the noticee thought it fit to entrust a tiny unit with provisional registration certificate to manufacture/assemble a sophisticated lift saving equipment such as "Complete Electronic Ventilator system". Further, I find that the noticee have admitted that without ascertaining the capability of the supporting manufacturer, to undertake manufacture, assemble a sophisticated life saving Medical equipment such as Complete Electronic Ventilator system, they had falsely projected M/s. Ardent Mechatronics, Bangalore as the supporting manufacturer. All the above facts clearly established that the Noticee has mis-represented facts to various authorities to misuse the DEEC and Rupee Rouble trade for earning undue benefit."
And thereafter found that imported goods were rendered liable for confiscation under the provisions of Section 111(m) and Section 111(o) of the Customs Act, 1962 (as recorded in para 135 of the impugned order).
(e) He denied the benefit of Notification 51/2000-Cus., dated 27-4-2000 and found it not available and held them liable for action on the following ground.......
"I find from the records that Shri Diwakar Mischra has admitted in his statement that each ventilator would be received in India in two separate boxes and each of these boxes would have the machine sl. no. indicated on it and that one of these boxes contains the main base unit, which has the machine sl. no indicated on it and that all the assemblies would have a sticker affixed on it which indicate the machine sl. no. indicated on it. This is because each of the PCB will work only when fitted to the particular machine sl. no. This arrangement of packing as admitted was arranged by himself with the manufacturer M/s. Mallinckrodt (U.K.) Ltd., and he also admitted that PCB of the ventilator machine comes with inbuilt software in Russian language and that he had placed orders with the foreign supplier M/s. Novo LLC USA (dealer of M/s. Mallinkrodt (U.K.) Ltd., for supply of 'Complete Ventilators'. This amply proves that they are not eligible for the benefit of Notification 51/2000-Cus., dtd. 27-4-2000. In view of the above, they are liable to pay duty under Section 28 (1) of the Customs Act, 1962 for the goods imported under Bill of Entry No. 52731 dtd. 6-12-2000 and the duty demand-able works out to Rs. 1,40,84,474/- and the interest thereon and for the goods imported under Bill of Entry 03581 dtd. 30-1-2001, the duty demandable works out to Rs. 1,75,55,383/- and interest thereon. They are also liable to pay the interest demandable under Section 28AB of the Customs Act, 1962 from the date of clearance till the date of payment of the customs duty. In view of the above findings M/s. Lucky Exports are liable for penal action under Section 114A of the Customs Act, 1962 and the partners as detailed earlier under Section 112(a) of the Customs Act, 1962."
As regards other appellants, he found their liability for penalties in paras 138 & 139 of the impugned order. Thereafter he considered in various paragraphs the submissions of the appellants and rejected the same and pass the following order.
"109. The Show Cause Notice refers to the above statement of Shri K.Y. Ashok Murthy in paras 11, 12, and 18. It is the submission of the notices that in the light of the legal position as set above, the process undertaken on the imported goods amounts to manufacture as set out in the EXIM Policy and consequently the allegation in the Show Cause Notice to the contrary is incorrect and non-sustainable.
110. The Show Cause notice in this connection avers in para 18 that the assembly and testing was not required to be done by the notices but was done only to substantiate the value addition declared to the licencing authority."
8. The present appeal is against this order. M/s. LEND have made the following submissions.
"A. Definition of Manufacture as Contained in The Export Import Policy satisfied in this case :
A.1 Para 3.31 of the Export-Import Policy for the period 1-4-1997 to 31-3-2002 (as amended up to 31-3-2001) defines "manufacture" as under:
"Manufacture" means to make, produce, fabricate, assemble, process or bring into existence, by hand or by machine, a new product having a distinctive name, character or use and shall include processes, such as refrigeration, repacking, polishing, labeling and segregation. Manufacture, for the purpose of this Policy, shall also include agriculture, aquaculture, animal husbandry, floriculture, horticulture, pisciculture, poultry, sericulture, viticulture and mining." (Pg. 448-449) A.2 That the definition of "manufacture" in the case of exports is not to be construed in a rigorous manner is evident from the fact that the definition of manufacture in the Export Import Policy also covers a process of assembling, polishing, segregation which in its strict sense would not amount to manufacture of excisable commodity.
A.3 That the definition of "Manufacture" in the case of Exports is wide in its application is evident for instance from Rules 12 & 13 of the Central Excise Rules, 1944 as they existed prior to 1-7-2001, which defined a process of manufacture for the purpose of export, as including the process of blending of any goods or making alterations or any other operation thereon.
A.4 This position of a liberal interpretation of "Manufacture" in the case of exports is also evident from the Circular 314/30/97-CE dated 6-5-97 issued by the Central Board of Excise & Customs while interpreting the benefit of Notification No. 1/95-C.E. dated 4-1-95 applicable in the case of 100% EOUs. (Pg. 452-453) A.5 In this Circular, the Board clarified that a broader view is called for in interpreting the provisions of the said Notification 1/95-C.E. dated 4-1-95 and that the term "manufacture" for the purpose of export is wider in meaning than that used in the Central Excise Act, 1944; that while the process of galvanizing per se would not amount to manufacture under the Central Excise law, it would amount to manufacture for the purpose of export.
A.6 The above Circular has been taken note of by the Tribunal in the case of CC v. Weston Electronics reported in 2000 (116) E.L.T. 181. In this case, the assessee, a 100% EOU, was merely undertaking the process of packing recorded audio compact discs in jewel boxes with relevant printed title of songs etc., in export-worthy packing. The Revenue contended that this activity did not amount to manufacture under the Central Excise law. The Revenue, therefore, sought to demand duty on the goods imported under Section 28 of the Customs Act, 1962 seeking to deny the benefit of Notification 13/81. The Tribunal rejected the contention of the Revenue holding that while the purpose of the Central Excise Act is to collect duty on the manufacture of the goods in India, the purpose of Notification in question was to promote export and that a broader view has to be taken as done by the Central Board of Excise & Customs.
Activities undertaken by the Appellants B.1 The imported material and the indigenous raw material on receipt at the premises at No. 5, 1st Floor, Anjanadri Plaza, Giri-nagar I Phase, Bangalore-85, were subjected to inspection.
B.2 The frame for the base unit consisted of pneumatic and electromechanical components. The pneumatic elements which figured at Sl. Nos. 2, 3 & 4 of the invoice of NOVO LLC included Oxygen Regulator, Oxygen Regulator Pressure Transducer and Oxygen Solenoid Assembly. The PCBs figured at Sl. Nos. 5 to 8 of the said invoice and also included the PCB Controller, PCB Pressure Solenoid, PCB Battery backup, and PCB UI display. While the pneumatic elements performed all the basic functions of the ventilator, the electronic components viz., populated PCBs performed the operation of measuring, controlling and regulating the functions of the ventilator. All the components mentioned above were assembled to make the base unit. The process of assembly involved the integration of items mentioned above to the Base Unit.
B.3 The other items mentioned at Sl. Nos. 9 to 22 of the invoice of NOVO LLC were items which were in the nature of parts and accessories of the ventilator. The items included filters, power cords, humidifier system, humidifier chamber, adapter etc. These items were also assembled on to the Base Unit.
B.4 The next process involved replacing the EPROMs loaded with the Russian software that were contained in the components imported and replacement with the EPROMs that were loaded with the English language version of the software in the Controller PCB.
B.5 The next process involved the testing of the electrical and pneumatic parameters as per the system specifications in which the consumables like oxygen gas, purified air etc., were used as also a system testing which consisted of verification of the modes of ventilation, Set Alarm conditions, pressure volume etc. These tests were carried out using general purpose, and custom-built test equipment like digital multimeter, oscilloscope etc. B.6 In the next process, (the assembly of locally procured material was done in which the communication panel of the Base Unit was removed from the Base Unit and connector, cutouts were made using drilling machines. The cutouts were then connected with the cables to transmit the analog signals from the controller PCB of the Base Unit to the display monitor. After testing the signals, the display monitor was assembled to the Base Unit. Thereafter, the Base Machine, the display monitor and the humidifier unit was fitted on to the trolley and various tests were then carried out to check the display functions like wave form of the flow volume and pressure, the loops and communication with the Base Machine etc. B.7 The process of calibration which was then carried out involved the measurement of the timing and analysis of the signals, measurement of the set values of various parameters at the designated output points since the basic function of a ventilator is essentially the delivery of the air-oxygen mixture at pre-set pressure, volume and in a particular mode.
B.8 The ventilator became a complete system only after completion of all the above processes.
B.9 After completion of the assembling, testing and calibration processes, the Russian language software was then reintroduced in the EPROMs in the Base Unit.
B.10 After completion of the above process, the parts and accessories were dismantled for packing. While the Base Unit along with some parts and accessories were packed in one box, the display monitor with some imported as well as local parts and accessories were packed in another box. The trolley was packed in a third box.
B.11 The averments in the show cause notice (Paras 11, 12 & 18) and the statements relied thereupon confirm the process undertaken on the items imported and the items indigenously procured, as indicated below:
B.12 In his statement dated 30-1-2001, Shri Gopinath of M/s. Ardent Mechatronics has stated as under :-
"Question 2 : Please explain the nature of supervision exercised by you.
"A.2 The imported and locally procured material would be arranged to be brought to No. 5, 1st Floor, Anjanadri Plaza, Girinagar, I Stage, Bangalore-85. Thereafter I used to supervise the unpacking of the same by Mr. Prasad and Mr. David. I also used to supervise the assembling and Testing and repairing."
B.13 In his statement dated 31-1-2001, Shri. Ashok Murthy, Managing Director of M/s. Erkadi International, has deposed inter alia as follows:
"Before commencing delivery, Mr. Diwakar enquired with me whether we should assemble the various assemblies and sub-assemblies and test it before export for which I informed and it was agreed between us that for the additional activity of assembly and testing we would be paid an amount of Rs. 15,000/- per ventilator. To compensate us for the manpower required, wear and tear of testing equipment, and cost of consumables. As per this oral agreement, I deputed my service engineers Mr. S.N. Prasad and Mr. I. David for the said work of assembly and testing carried out at No. 5, Anjanadri Complex, I Floor, I Phase, Girinagar, Bangalore-85. I have also visited the said premises when my people were working there to oversee the arrangements and I have witnessed the entire process involved. To your specific question I state that the imported items consisted of 22, comprising Base Unit Assembly, Assemblies for Oxygen Regulator, Oxygen Regulator Pressure Transducer, Oxygen Solenoid and Populated PCB sub-assemblies for controller, pressure solenoid, battery backup and UI Display. The rest of the items were in the nature of accessories. The activity involved was to assemble the assemblies and sub-assemblies together by employing a simple screwdriver technology. A major component of the work involved for us was in calibrating and testing the ventilator and its communication with the display unit."
B.14 In his further statement dated 27-2-2001, Shri Ashok Murthy has stated as follows :-
"Further, I wish to add that the display unit accesses the analog and digital data outputs from 760 ventilator. The Philips processor (8051) on the Motherboard of the Display Unit supplied by us processes this data and displays on the LCD screen in the forms of wave forms, loops and numbers."
The DR has made the following submissions :
"C/25/2000 Lucky Exports & others v. CC, Bangalore The persons involved are :
Importer in India : Lucky Exports, a Delhi-based trading concern, Buyer/Consignee : Ministry of Defence, Russia.
Supplier : Novo LLC, USA, authorized agent of Mallinkrodt, Ireland.
Manufacturer: Mallinkrodt Inc. Supporting manufacturer as declared by Lucky Exports to DGFT: Ardent Mechatronics, Bangalore.
Agent of Mallinkrodt in India : Moola Technologies, Bangalore Supplier of display monitors to Lucky Exports : Erkadi International, Bangalore Person behind both Moola Technologies and Erkadi: Ashok Murthy The events:
Lucky Exports, a partnership concern that has been trading with Russian parties, was given a contract by the Russian Government to supply medical equipment, namely, 255 numbers of "complete electronic ventilation system", to hospitals functioning under the Russian Ministry of Defence. The contract is dated 17 July, 2000 and is placed at Annexure I of the paper book.
Lucky Exports in turn contacted a manufacturer, namely, Mallinkrodt (UK) Ltd., Ireland, UK, who advised them as follows in their letter dated 15 August, 2000 : "With reference to the supply of medical equipment (Ventilators) to the Ministry of Defence Russian Federation, our authorized agent for the supply is : M/s. Nova LLC, 201, North Dupont Parkway, New Castle De, 19720, USA." (Annexure 3 in the paper book) Thereupon Lucky Exports entered into a contract dated 18 September, 2000 with Nova LLC according to which it was contracted as follows: "The Seller shall sell and the Buyer shall buy on EX WORKS Galway of Ireland (by INCOTERMS 1999) terms the set of medical equipment, hereinafter known as "equipment" according to Appendix No. 1 to the present contract." The Appendix at page 23 of the paper book is captioned "Puritan Bennet NPB Ventilator", and under this caption it gives the description of the goods in the form in which they are shipped. (The contract with Nova LLC is at Annexure 3 of the paper book.) Lucky Exports applied on 14 October, 2000 to the DGFT for an advance licence for physical exports. (Annexure 5 of the paper book.) Therein they declared Ardent Mechatronics as their supporting manufacturer, and declared a value addition of 68.717 per cent. The largest component of the value addition claimed was software valued at over a crore and a half in rupees (page 35 of the paper book).
The appellant M/s. Lucky Exports imported medical equipment (ventilators) from USA under advance licence claiming the benefits of customs notification 54/2000. The goods were described in the bill of entry as components of ventilating system. They declared to the DGFT that they were using the imported goods in the manufacture of ventilating systems in India, and named Ardent Mechatronics, Bangalore, as their supporting manufacturer who would do this work for them. They declared a value addition of 68.71 per cent. Subsequently they exported "complete ventilating systems" to Russia and received payment for the same under the rupee-rouble agreement.
Goods under one bill of entry were actually imported under exemption and exported from Bangalore under the DEEC scheme. In respect of the second consignment, the customs officers examined the goods and found them to be complete ventilators. The benefits of the exemption Notification 54/2000 were denied to them. The goods were provisionally assessed to duty, and the assessment was confirmed by the order of the Commissioner of Customs that is impugned before this Tribunal. In respect of the first consignment the impugned order demands duty by denying the benefits of import under advance licence which is conferred by Notification 54/2000-Cus.
The issues here are :
Were the imported goods used in the manufacture of Indian goods, so as to qualify for the DEEC scheme and the related customs exemption?
Was the value addition by the importers sufficient so as to make them eligible for advance licence?
The department's case is that the appellants are guilty of misdeclaration to the DGFT; that neither manufacture nor the declared amount of value addition took place; and that the apparent value addition that results from a comparison of the import value and the export value is illusory as it results from the peculiarities of rupee-rouble trade.
Manufacture ?
According to the declaration made to the DGFT, the manufacture was carried out by Ardent Mechatronics. However it was found that Ardent Mechatronics had no machinery, personnel or expertise to carry out the work, and Shri Gopinath had merely lent the name of a concern existing on paper, for a consideration of Rs. 2000/- per ventilator. However in the papers filed with the DGFT it was shown as if he was being paid Rs. 80,000/- per ventilator for the manufacturing processes said to be carried out by him. Search operations on 30-1-2001 at the business and residential premises of Shri Gopinath yielded two sets of agreement with Lucky Exports containing identical matter except for the amount of remuneration. The plain paper copy showed Rs. 80,000/-, while the stamp paper copy showed Rs. 2000/-. Shri Gopinath stated on 30-1-2001 that he had no role but to lend the name of his firm; that he had no technical/financial role; that the agreement on stamp paper was signed early December 2000 but backdated to October; that the agreement on plain paper was got signed by him in the third week of December 2000 by Shri Mukesh Kumar (Export Manager) of Lucky Exports who said that it was required for submission to the DGFT.
A comparison of the goods imported and the goods exported showed that the imported goods were exported to Russia in their original packing, with the addition of cartons containing the locally purchased items. No "tangible processing of manufacturing process" as stipulated by the DGFT's Circular No. 50 (RE-99) was carried out on the goods. The activity that was admittedly carried out was a trial installation on locally procured trolley, and test run, under the supervision of Ashok Murthy. (The calibration that is claimed by the appellants as a manufacturing activity is something that must be done each time a precision instrument is used.) The second consignment is said to have been taken to Delhi for manufacture. The second consignment arrived after investigations into the first had begun. The fact that it was taken away to Delhi though Ardent Mechatronics, declared as the supporting manufacturer, was in Bangalore, shows that Ardent Mechatronics was in fact not capable of carrying out any manufacturing, much less under the scrutiny of the investigating officers.
The party named as having carried out the manufacture of complete ventilating systems in Delhi was not declared to the DGFT.
Value Addition ?
To qualify for an advance licence, the imported goods must be used in manufacture of Indian goods, and the value addition should be over 33 per cent. This is confirmed by Circular No. 50 (RE-99)/99-2000, dated 28-1-2000, which further stipulates that the value addition should be achieved by adding to the intrinsic value of the goods by a tangible processing or manufacturing process.
In this case the appellant has shown value addition of 68.71 per cent. The break-up of intrinsic value addition is given, which comprises mainly addition of monitor and software.
Shri Ashok Murthy stated that the software is already contained in the EPROMs which are part of the display monitors, and that no separate loading of software is carried out in India. Thus the declaration to the DGFT is clearly a fraudulent one.
The actual value addition that took place in India is clear from the following worksheet:
Value of one unit of ventilator at import Rs. 12,91,926 Value of locally procured goods and services Rs. 67,000 Percentage of value addition 5.18%
However the rupee value of the exported machine is Rs. 24,49,343, which is on account of the rupee-rouble agreement, and does not constitute intrinsic value addition. The increase has come about because the supplier quoted his price in US dollars, which was converted to roubles by the Russian buyer, and in turn paid in rupees under the rupee-rouble agreement.
[Some background information is in order here :
The Rupee rouble agreement dates back to 1990, when India was a significant importer of Russian arms and oil. After USSR's collapse, Russia took over India's entire debt. This period also saw the collapse of the Russian currency from US dollar parity the rouble fell to 572 rouble per US dollar. The value of the Indian debt thus could be construed as lowered by a few billion dollars. This led to bickering over the value of the Indian debt, and Indo-Russian trade plummeted.
The need to revive trade led to the February 1992 rupee-rouble trade agreement. The debt was re-calculated at Rs. 314 billion using an exchange rate of Rs. 20 per rouble. It was payable to the extent of USD 1 billion over a period of 12 years at this rate, and the remaining amount over the following 33 years. Every year the RBI credits the Russian Central Bank with Rs. 30 billion, which is then used to buy Indian goods.
The Policy Circular No. 50 (RE-99)/99-2000 cited above clarified that "the rupee debt payment scheme was envisaged to increase export of Indian goods to Russia."] An argument is being taken that the goods were anyway in the exempted category. However the exemption is not applicable if the goods are only routed through the country, as clarified by the Supreme Court in the case of MJ Exports reported in 2001 (132) E.L.T. 514 (S.C.), which is relied upon by the Commissioner in para 156 of his order.
The role of Shri Ashok Murthy Shri Ashok Murthy was partner in Moola Technologies, the dealer for Mal-linkrodt in India. He was also Partner in Erkadi International, from which firm he supplied display monitors to Lucky Exports. He arranged the association of Shri Gopinath with the import-export activities of Lucky Exports. He sent persons from Moola Technologies to unpack and inspect the goods at premises arranged by Shri Gopinath, who had no personnel of his own. He thus actively assisted Lucky Exports in presenting Ardent Technologies as a supporting manufacturer to the DGFT."
9. Thereafter the matter was heard and closed for decision. After the matter was reserved, it transpired that the Hon'ble Apex Court in the case of Titan Medical Systems v. CC in Civil Appeal No. 4693/1995 [2003 (151) E.L.T. 254 (S.C.)] had in similar circumstances, dismissed the Show-cause Notice and the orders of the Commissioner and the CEGAT in that case, confirming the demands and penalties. Therefore, this matter was re-listed for hearing and the parties were re-heard wherein the learned Advocate for M/s. LEND Shri Lakshmikumaran read the Supreme Court Order in the case of Titan Medical Systems and drew our attention to para 5 of the decision which reads as under:
"The Collector as well as CEGAT have held that the appellant M/s. Nicolian Brothers had made a misrepresentation to the licensing authority and that licence had been obtained on the basis of such misrepresentation. The misrepresentation alleged is that in their application they had indicated that they would use indigenous components of the value of Rs. 2,32,69,200/- and that labour, packing and other charges would be to an extent of Rs. 2,07,89,447/-whereas in actual facts they used components only to the extent of Rs. 8 lakhs and paid approximately only Rs. 5 lakhs towards labour charges. It is also held that neither M/s. Nicolian Brothers nor M/s. Titan Medical Systems Pvt. Ltd., had undertaken any manufacturing activity at all,"
And submitted that the Tribunal, in that case, vide their order, had recorded in detail, facts which he relied upon, to submit, that the arguments now being taken by the Revenue as upheld by the CEGAT in the Titan Medical System's case have not been approved by the Apex Court to confirm duty demands and penalties or even the Show-cause notice. He also relied upon the Supreme Court decision in the case of BPL India Ltd. v. CCE, Cochin [2002 (143) E.L.T. 3 (S.C.)] to submit that assembly of imported goods amounts to manufacture.
10. The learned DR submitted the following arguments and differentiated the Titan Medical Systems case of the Supreme Court on the ground that in that case there was no fact of separate packing of the Indian Components and she relied upon various decision as extracted herein above to submit that the Hon'ble Apex Court decision in the case of Titan should not be followed and applied in this case.
Under the Customs Act, the customs duty leviable on raw materials is exempted vide Notification No. 51/2000 dated 27-4-2000. To avail the exemption, an importer of raw material is required to fulfil the conditions specified in the exemption Notification. Some of the relevant conditions specified in the exemption, which has to be fulfilled on import of raw materials are as under -
(i) The Notification enables importing of raw materials, components, intermediates, consumables, catalyst, computer software and parts required for manufacture of resultant product. It is therefore clear that the raw materials/parts should be used in the manufacture of a specified resultant product and if this is not done it amounts to contravention of the conditions in the exemption Notification.
(ii) Part (a) of the exemption Notification requires that the importer should specify the name and address of the factories where resultant products of export are manufactured. If the manufacturing activity does not take place in these factories, it would result in contravention of the conditions in the exemption Notification.
(iii) Part (c) and (d) of the Notification enumerates the particulars of the materials imported. The word "materials" is defined un der Clause 2(iv) of the exemption Notification. In other words, it refers to the raw material, which is imported for being used in the manufacture of the final product. If the raw material do not correspond to the declaration, the same would violate the conditions specified in the exemption Notification. In the pre sent case, in the guise of importing raw materials/parts, the importer has imported finished goods, and this is a clear case of misdeclaration.
(iv) Part (g) of the exemption Notification reads as under - "duties paid on raw materials in respect of which conditions of said Notification are not complied with". This categorically states that in case any of the conditions of the exemption Notification is not complied with, the full duty becomes payable in accordance with the declaration given by the importer. In the present case, since the condition of exemption Notification has not been complied with, the importer is not entitled to avail the benefits of the exemption Notification, and the entire customs duty becomes payable.
(v) The exemption Notification requires that the importer shall execute a bond binding himself to pay on demand an amount equivalent to the duty but for exemption on the imported materials in respect of which the conditions specified in this Notification have not been complied with. It therefore clearly stipulates that where the conditions specified in the exemption Notification has not been complied with, the Customs authority is entitled to demand the differential customs duty. The importer has accordingly executed a bond undertaking to pay the differential duty in case, the conditions for exemption Notification are not fulfilled. It is therefore clear that once the importer fails to adhere to the conditions specified in the exemption Notification i.e., importing of raw materials and use the same for manufacturing of the specified final product, the Department is entitled to demand differential duty.
The Customs Department has initiated action for contravention of the conditions specified in the exemption Notification. The show-cause notice does not relate to initiating action for contravention of conditions mentioned in the advance license. For such contravention, the action will have to be taken in accordance with the provisions of Foreign Trade (Development and Regulation) Act, 1992. The show-cause notice clearly refers to Sections 111 (m) and (o) of the Customs Act. In this regard the relevant portion of para 27 reads as under -
"NOW THEREFORE, M/s. Lucky Exports, New Delhi, the partners of the said firm Shri Aashish Oberoi, and Shri Diwakar Mishra are hereby called upon to show-cause to the Commissioner of Customs, CR Bldg., Queen's Road, Bangalore, within 30 days of the receipt of this notice as to why,
(a) the goods imported under Bills of Entry No. 52731 dt. 6-12-2000 and 03581 dt. 30-1-2001, totally valued at Rs. 5,87,92,657/-should not be held liable for confiscation Under Section lll(m)/Sec. lll(o) of the Customs Act, 1962.
It is therefore clear that the importer has been called upon to show-cause for contravention of the Customs Act, Rules and Notification and no action has been initiated under the provisions of the Foreign Trade (Development and Regulation) Act, 1992. The action that is initiated is relatable only to the provisions of the Customs Act, and as such the same cannot be objected to by the importer.
Section 2(33) defines the word "Prohibited goods" to mean any goods, the import or export of which is subject to any prohibition under the Customs Act or any other law for the time being in force. Similarly Sec. 3(3) of the Foreign Trade (Development and Regulation) Act, 1992 states that all goods in respect of which the Central Government has prohibited or restricted the import or export under Section 3(2), shall be deemed to be prohibited goods under Section 11 of the Customs Act. In other words, a prohibition even under Foreign Trade (Development and Regulation) Act is deemed to be a prohibition under the Customs Act. In the present case, the Department is only initiating action for contravention of the Customs exemption Notification. Even otherwise, a prohibition or restriction imposed under the Foreign Trade (Development and Regulation) Act, will have to be considered as a prohibition or regulation imposed under the Customs Act also. To explain there is an interplay between both the enactments for the purpose of enforcing the provisions of the two enactments, the Customs authorities at the time of export or import, are entitled to examine as to whether the provisions of any other law is complied with or not. That being so, it is not correct to state that merely because there is a contravention of the condition mentioned in the advance license as well as the condition mentioned in the exemption Notification, are infringed, the Customs Department should be prevented from taking any action. If the same act amounts to contravention of both the enactments, it cannot prevent the Customs Department from initiating action and impose penalty insofar as the infringement of Customs Act, Rules, and Notification is concerned. It may only prevent the Customs Department from imposing penalty or initiating any action under the Foreign Trade (Development & Regulation) Act. The said action cannot be questioned merely because it also constitutes a violation of the Foreign Trade (Development and Regulation). Such a arrangement would allow an importer to take advantage of his own wrong.
Section 111 (o) states that the following goods shall be liable for confiscation.
"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"
It therefore provides that where a condition imposed under any other law for filing of exemption is not fulfilled, the Customs Authority are entitled to confiscate the goods. The only plea available for the importer/exporter in such a case is to contend that the non-observance of the condition was sanctioned by the proper officer. If such a plea is not taken the Department is entitled to confiscate the goods where it is a condition imposed under the Customs Act or any other law in force. This provision has been relied upon in the case of Madan Lal Anand v. UOI [1990 (45) E.L.T. 204 (S.C.) = AIR 1990 SC 176] wherein it is stated as under-
"In view of Clause (o) of Sec. 111, if any goods exempted from payment of duty is imported without observing the conditions subject to which the ex- emption has been made, it will be a case of smuggling within the meaning of Section 2(e) of the COFEPOSA Act"
That being so, non-compliance of a condition subject to which exemption is granted, would convert the act of importing goods into smuggling.
The Hon'ble Supreme Court has again examined this issue in the case of Jacsons Thevara v. CCE - 1992 (61) E.L.T. 343 (S.C.) = AIR 1991 SC 647 wherein it is stated as under -
"These contentions, in our view, are misconceived because here the customs authorities have not taken action against the Appellant for breach of any condition of the import licence dated February 14, 1979. Action has been taken against the Appellant under the provisions of the Act for obtaining clearance of the goods by paying customs duty on a concessional rate under Heading 84.66 of the Customs Tariff by suppression and wilful misstatement of facts........
The office of the Deputy Chief Controller of Imports & Exports, Cochin, had no role in the matter of levy of customs duty on the imported machinery.."
These judgments have been followed in the case of Kamath Packaging Ltd. v. Union of India [1991 (55) E.L.T. 304 Kar.] wherein the court has observed as under:
"We are unable to agree with this submissions because as rightly urged by the Department, but for this Notification viz., Notification No. 116/88, the matter would have been different"
The court has further pointed out that the Customs Department is only concerned with the contravention of the customs Notification and as such they are competent to initiate action under the Customs Act. This again was reiterated in the case of Sheshank Sea Foods Pvt. Ltd. v. Union of India [1996 (88) E.L.T. 626 (S.C.)].
The fact that the importer has violated the provisions of the Customs Act, Rules & Notification is also clear by the conduct of the importer. The importer has suppressed the material fact from the Customs Department and has filed false and wrong declaration to the Department. The declaration have been filed contending that he is importing raw materials even though what is imported is complete manufactured goods. The declaration has been filed indicating that he is manufacturing and exporting finished material even though the importer is importing and exporting the very same material without any value addition. The importer has declared that he is carrying out manufacturing activity in a specified place, and on inspection, it is found that no such manufacturing activity is taking place. In similar circumstances, the larger bench of CEGAT has held in the case of Vulcan Engineers Ltd. v. Collector of Customs [1992 (62) E.L.T. 636] that where the imported goods are not utilized for the manufacture of resultant product, the same would amount to contravention of the exemption Notification. In the said case, the Tribunal found that the manufacturing activity should have taken place at the place specified in the declaration. When the manufacturing activity is not carried out in the specified place, it would amount to a clear violation of the exemption Notification. In the present case, the contravention is of much more serious in nature. The importer has not carried out any manufacturing activity at all. The importer is importing finished goods and exporting the same without carrying out any manufacturing activity in India. This judgment clearly establishes that the facts involved in the present case would amount to contravention of the conditions specified in the exemption Notification.
In this matter, the importer is relying upon the judgment of the Hon'ble Supreme Court in the case of Titan Medical Systems Pvt. Ltd. In the said case the Supreme Court has observed as under :
"To be noted that the licensing authority having taken no steps to cancel the licence. The licensing authority have not claimed that there was any misrepresentation"
This observation was made with reference to the contention raised before the Supreme Court which is as under :
"As regards the contention that the Appellants were not entitled to the benefit of the exemption Notification as they had misrepresented to the licensing authority, it was fairly admitted that there was no requirement, for issuance of a licence, that an applicant set out the quantity or value of the indigenous components which would be used in the manufacture."
The contention advanced in the said case was that the importer had misrepresented before the licensing authority. In fact it is also observed in page 3 of the judgment as under-
"The Collector as well as CEGAT have held that the Appellant - M/s. Nicolian Brothers had made a misrepresentation to the licensing authority and that licence had been obtained on the basis of such misrepresentation".
The issue that was involved before the Supreme Court was whether the Customs authority are entitled to take a contention that the importer had made a misrepresentation before the licensing authority while adjudicating the matter under the Customs Act The court has said that if there is any misrepresentation, it is for the licensing authority to take action. This also becomes clear from the last sentence used in the said para, where it is stated as under :
"If there was any misrepresentation, it was for the licensing authority to take steps in that behalf"
This legal position cannot be disputed and it is not the contention of the Customs Department that it is entitled to take action under the Foreign Trade (Development and Regulation) Act for contravention of the conditions of the advance license. In the present case also, it is not the stand of the Department that action is being initiated for misdeclaration or misrepresentation to the licensing authority. The transaction is confined only to contravention of the exemption Notification. In the present case, the allegations do not pertain to any misrepresentation made at the time of obtaining the license, and it relates to non-compliance of the conditions mentioned in the exemption Notification after obtaining a advance license. One of the pre-requisite for availing of the customs duty exemption is that a importer should have an advance license. After obtaining an advance license, the importer is also required to constantly adhere to the conditions mentioned in the exemption Notification. If there is any such contravention, the Customs Department is entitled to initiate action. The facts of the present case is identical to the decision of the Jagadish Cancer Research Institute [2001 (132) E.L.T. 257]. In the said case, the exemption Notification provides that the Director General of Health & Family Welfare is required to is-sue a certificate that the hospital is eligible to import medical equipments. One such certificate is issued, Customs Department allows import of the medical equipment giving exemption from payment of customs duty. After the import of medical equipments, the importer is required to fulfil the conditions mentioned in the exemption Notification. In such a case the Supreme Court has held that the Customs Department can monitor the compliance of these conditions and demand customs duty in case there is contravention of the conditions specified in the exemption Notification. This is so notwithstanding the fact that the Director General of Health & Family Welfare is also competent to initiate the action to cancel the certificate earlier granted. The Supreme Court has held that the Customs Department on its own is competent to verify the compliance of the conditions in the exemption Notification and can take action to demand customs duty even though the certificate granted by the DGHS is not revoked. The facts of the present case is in pari materia with the case of Jagadish Cancer & Research Center's case. The facts involved in the case of Titan Medical Systems Pvt. Ltd. has no relevance to the facts of the present case. The Hon'ble Supreme Court has consistently taken a view in the case of Jacsons Thevara and in the case of Sheshank Sea Foods Pvt. Ltd., that the Department is entitled to initiate action so long as there is contravention of exemption Notification. It is therefore clear that in all such cases, what is to be seen is whether there is contravention of customs duty exemption Notification or not and if the contravention is established, the Department is entitled to confiscate the goods.
Apart from the above-mentioned condition, the allegation made out in the show cause notice clearly establishes an act of fraud on the part of the importer. The importer has adopted a devious method of importing finished goods and exporting the very same goods by submitting a false declaration that importing raw materials/parts and is exporting the finished goods after carrying out manufacturing activity. This is done with the intention of misusing the scheme of rupee-rouble trade. In fact the importer will make a profit of nearly Rs. 10 crores in respect of the goods covered in the two bills of entry mentioned in the show-cause notice. It is well settled that fraud if established, unravels all. The Supreme Court in the case of Union of India v. Jain Shudh Vanaspati Ltd. [1996 (86) E.L.T. 460] has stated as under :
"A clearance order under Sec. 47 obtained by fraudulent means such as this, cannot debar the issuance of show-cause notice for confiscation of goods Under Section 124. Fraud, if established, unravels all. The order Under Section 47 obtained by employment of fraudulent methods, does not have to be set-aside by exercise of revisionary powers Under Section 130 before the ill-effects of the fraud can be set-right by initiation of the process of confiscation of the fraudulently cleared goods Under Section 124."
In the present case, the importer has perpetrated a fraud and he cannot be allowed to get away by advancing a contention that another authority has not initiated action against him. Since the allegation against the importer has been established, it would be unjust to allow a person to take advantage of such a fraudulent act."
11. We have considered the submissions and find :
(a) The facts in the Titan Medical System's case and in the present case cannot be differentiated, the attempts being made by the SDR notwithstanding. Therefore following the law laid down by the Apex Court, we would set aside the present order and the Show-cause notice and allow the appeal with consequential benefits to all the appellants.
(b) In the present case we find that M/s. GE Medical Systems has provided for the certification by Central Excise Officers of manufacture having taken place in their premises. The DRI Officers have permitted exports on and after verification. This would indicate following the BPL case, that manufacture in this case did take place and there was no case or cause to have issued the Show-cause Notice.
(c) Since no duty demands and show cause notice is being upheld, there is no case for penalty on any appellant.
12. in view of the findings the appeal are allowed with consequential benefits.