Demand under Customs Act for duty forgone on diversion of duty free imported goods to DTA

Case: M/S EASTERN SILK INDUSTRIES LIMITED & ANR v/s COMMISSIONER OF CUSTOMS, BANGALORE

Citation: 2011-TIOL-1618-CESTAT-BANG

Issue:- Demand under Section 28(1) of the Customs Act, 1962 – Voilation of Conditions of Notification No. 13/81-Cus - Whether permission of DGFT is required when there is demand of duty forgone on diversion of duty free imported goods to DTA?

Brief Facts:- The appellant herein was a 100% EOU set up to manufacture mulberry silk fabrics. The appellant was permitted to import capital goods and raw materials duty free and started their imports in September 1994. One of the item which was permitted to be imported duty free was principal raw material viz., raw silk yarn. On a specific information that the appellant have resorted to diversion of the duty free imported raw materials into the local market by violating the scheme of 100% EOU, investigating authorities conducted search operations at the factory premises, office premises and residential premises of one of the directors. During the search operations, physical stocks of raw materials were taken and it was noticed that there is a shortage of principal raw materials to the tune of 15,543.40 kgs. Show-cause notice was issued for demand of duty foregone by the Revenue on this quantity and also for imposition of penalty for violation of the conditions of notification and for demand of interest on the duty foregone. Appellant herein replied to the show-cause notice and attended the personal hearing granted by the Adjudicating Authority. The Adjudicating Authority after considering the submissions made by the appellants before him and going through the records, came to he conclusion that the appellant indeed had violated the conditions / scheme of the 100% EOU and held that the demand of duty needs to be confirmed. Coming to such a conclusion, he passed an order.

Aggrieved by such an order, the appellant-company as well as the Managing Director of the appellant-company preferred an appeal before the Tribunal. This Bench vide its Final Order No.748 & 749/2006 dated 4.4.2006 rejected the appeal filed by the appellants. Aggrieved by such an order, the appellants preferred an appeal before the Hon'ble High Court of Karnataka against the said final order of the Tribunal. Hon'ble High Court of Karnataka vide their judgment dated 9.4.2010 set aside the order and remanded the matter back to CESTAT.

Appellant’s Contention:- The appellant contended that there was violation of principles of natural justice as documents listed at SI. No.13 to 19 at Para 30 at page 128 of the paper-book were not supplied. They were also not given a copy of the record of personal hearing.

Further they held that here are factual errors in arriving at the alleged difference between the quantity in the books and which were actually available. The stock of silk fabrics meant for export as samples which were lying in the sampling room was not at all considered by the DRI officers on 14.5.1998. This was an unintended omission on the part of the DRI officers. The total quantity of samples sent for the purposes of booking orders to foreign countries is 518.074 kgs. The said samples have been sent by air through reputed counter services, thus evidencing the proof of export. They requested the wastage to be fixed at 34.76% and if it is admitted, difference in raw material to the extent of 4607.902 Kgs would be got covered.

The show cause notice and the impugned order speaks of Section 28 (1), Section 28A8, Section 65, Section 111 (d), 111 (o), 112(a)(I) and 114A of the Customs Act. These provisions are not applicable to the present case. The correct provisions would be Sections 17, 46, 58, 59, 60, 61, 64, 65, 68, 71 & 72 of the Customs Act, 1962. The provision for imposing penalty in this case would be 117 and not 114A.

The instant case is covered under Chapter IX of the Customs Act, which deals with warehousing provisions. Section 72 speaks of goods improperly removed from the warehouse. In the instant case, the right provision to demand duty is Section 72 of the Customs Act. Further Section 17 of the Customs Act speaks of assessment of duty. The bill of Entry is filed under section 46. The Bill of Entry can be either for home consumption or warehousing. In the instant case, Bill of Entry for warehousing is filed. Section 65 deals with the manufacture and other operations in relation to goods in a warehouse. Section 65 (2) deals with waste or refuse arising in the case of manufacturing in relation to any warehoused goods. As per Section 71, goods should not be taken out of the warehouse except as provided by this Act. Section 72 speaks of goods improperly removed from the warehouse, etc. According to the above Section, in respect of goods for which a bond has been executed under Section 59 and which have not been cleared for home consumption or exportation, and are not duly accounted for to the satisfaction of the proper officer, the proper officer may demand, and the owner of such goods shall forthwith pay the full amount of duty chargeable on account of such goods together with all penalties, rent, interest and other charges payable in respect of such goods. Section 117 of the Customs Act speaks of penalties for contravention, etc., not expressly mentioned.

In view of the above provisions, the demand of duty should be under Section 72 of the Customs Act, which is an inbuilt provision for goods improperly removed from the warehouse. As regards penalty, the right provision would be Section 117 only. Hence, invocation of Section 28 is not at all correct. Section 28 is applicable only when duty has not been levied or has been short levied or erroneously refunded which is not the case. Similarly, Section 112 speaks of penalty for improper importation of goods. That section cannot be invoked while dealing with Section 72 covered under Chapter IX of the Customs Act, 1962, which is exclusively a provision for demand of duty and levy of penalty in cases similar to the present one.

Further they submitted that the Adjudicating Authority has not considered the issue in a proper perspective and hence, confirmation of demand is incorrect and imposition of penalty is also incorrect. It is his submission that Revenue has not adduced any corroborative evidence except that there is a confessional statement of the Managing Director that duty free imported raw materials were diverted. It is his submission that except for such confessional statement and there being shortage of raw materials, there is nothing on record to indicate that there was clandestine removal of the goods. He relied upon the following case laws.

(i) Tejwal Dyestuff Industries Vs. CCE, Ahmedabad - 2007 (216) ELT 310 (Tri.- Ahmd.) = 2007-TIOL-1438-CESTAT-AHM

(ii) CCE, C & ST, Daman Vs. Nissan Thermoware P. Ltd. - 2011 (266) ELT 45 (Guj.)

(iii) CCE, Surat-I Vs. Shree Rohini Enterprises - 2010 (261) ELT 325 (Tri.-Ahmd.)

It is also his submission that the show-cause notice issued under Section 28 of the Customs Act, 1962 is incorrect, as the provisions of warehousing would be applicable in this case.

Respondent’s Contention:- The respondent argued that conditions of Notification No.13/81 are violated. It is his submission that findings in paragraph 23 of the adjudication order clearly indicate the violations. The Managing Director had initially given a confessional statement which was retracted but again reiterated on 11.11.1998. It is his submission that the statements which were recorded of the Managing Director clearly give the details which were only known to him. He submitted that the provisions of Section 72 could have been invoked in this case but it does not mean that just because the Revenue has not invoked Section 72, the entire show-cause notice is void. It is his submission that the conditions of Notification having been violated, the Revenue has correctly demanded the duty foregone. He also submitted that once the goods were held to be liable for confiscation, penalties imposed under Section 112 of the Customs Act will be applicable as the Revenue has invoked the provisions of Section 28 for the demand of duty on finding that there was violation of conditions of Notification and hence goods were liable for confiscation under Section 111 of the Customs Act, 1962. The penalty imposed on Managing Director was imposable for the offences made by him, as he was directly connected with the clandestine removal of duty free raw materials.

Reasoning of Judgment:- The Hon’ble CESTAT held that as regards the point regarding the statement recorded by Managing Director, Shri U. B. Venkatesh was allegedly put under duress and not voluntary, he find that on a specific query from the Bench, it was informed that retraction was not done immediately and the said statement was retracted at the stage of show-cause notice. It is also on record that the said Managing Director was arrested and sent to jail on the next day when the shortages were noticed and he preferred a bail application before the competent court and in the said bail application also there was no retraction of the first statement given by him. It is also on record that the Managing Director on 11.11.1998 confirmed the statement recorded by him in the first instant. In view of this, he find that he cannot come to the conclusion that the statements were recorded under duress and not voluntary.

Further he find that there is no evidence before the Adjudicating Authority or before us. The evidence on samples sent for purpose of booking orders to foreign countries could not be established by the appellants. In the absence of any such evidence, this point raised by the appellant seems to be incorrect.

As regards the point that wastages to be fixed at 34.76%, the learned counsel fairly submits that the Adjudicating Authority has given them wastage which is due and correct and concedes this point.

He further stated that the show-cause notice has been issued to the assessee-appellant and the Managing Director under the provisions of Section 28 (1) of the Customs Act, 1962 for the violation of the conditions of Notification No.13/81. On perusal of the show-cause notice, he find that in paragraph 23, the Revenue has clearly indicated that the appellant had violated the conditions under Customs Notification No.13/81 dt. 9.2.1981 inasmuch as that the goods which were imported duty free could be used only for the purpose of manufacture of articles for export out of India. Against such an allegation in the show-cause notice, the appellant was not able to produce any evidence that they had in fact used the said materials for the purpose of manufacture of the goods for export out of India. Further the point raised by the learned counsel regarding non-applicability of Section 28 (1) of the Customs Act, 1962 would be of any consequence, as goods were imported by the appellant availing the benefit of Notification No. 13/1981 and were assessed to 'nil' rate of duty relying upon the benefit of said Notification. If the conditions of Notification are violated, the said notification clearly mandates about the demand of duty. Once a benefit is extended to the assessee under Notification for discharge of 'nil' rate of duty and such conditions are violated, it would amount to short levy which requires to be demanded from the assessee only under Section 28 (1) of the Customs Act, 1962. It is also seen from the records that the appellants were charged for violations of conditions attached for the import of goods. On such violation being done, the penalties were imposed under Section 112(a) and 114A of the Customs Act, 1962. In this case, there is no dispute that the appellant is not able to provide the correct reconciliation of the materials which 'were imported duty free by him.

Decision:- Appeal rejected.

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PJ/Case Laws/2011-12/1500

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