Exemption under Notification No. 21/2002-Cus, Dated: 01.03.2002

PJ/CASE STUDY/2010-11/35

27 December 2010

PJ/Case Study/2010-11/35

Case Study

Prepared By:

Sukhvinder Kaur LLB [FYIC]

Megha Jain

Introduction:

In the case under study, the inputs imported for use by availing exemption under Notification No. 21/2002-Cus were not completely utilised in manufacturing finished goods to be exported. Part of the imported inputs were lying unutilised in the factory. Whether the benefit of exemption granted under the said Notification could be denied to the importer-assessee? Whether the customs duty could be demanded for the said goods? Whether the said goods could be confiscated from the importer? These are the issues involved in the case under study.

Relevant Legal Provisions:

Condition No. 12 of the Notification No. 21/2002-Cus, dated 01.03.2002: -

If,-

(a) the goods are imported,-

(i) by a manufacturer of handicrafts;

(ii) by a merchant exporter tied up with supporting manufacturer of handicrafts; or

(iii) on behalf of the said manufacturer or merchant exporter by the Export Promotion Council for Handicrafts,

for use in the manufacture of handicrafts for export by the said manufacturers or as the case may be, the merchant exporter and the said manufacturers or as the case may be, merchant exporter is registered with the Export Promotion Council for Handicrafts;

(b) the value of the goods imported does not exceed 5 per cent of the FOB value of handicrafts exported during the preceding financial year; and

(c) the importer produces a certificate from the Export Promotion Council for Handicrafts certifying the value of exports made during the financial year mentioned in clause (b) above and also the description, value and quantity of the item(s) already imported under this notification during the current financial year

In the matter of M/s Curio Crafts, Jodhpur (Rajasthan)

[Order-In-Original No. 263/ADC/Gr. VB/BN/2010-11, Dated: 08.10.2010]

Brief Facts:

- Noticee is engaged in the manufacture of handicrafts (clocks) which are exported to foreign countries. Noticee is importing Quartz Clock Movements (Analog) for the manufacture of their finished goods.

- Noticee had imported Quartz clock Movements (Analog) vide Bill of entries dated 07.01.2005, 06.04.2005. The consignments of the impugned goods were imported duty free by availing the exemption provided under Notification No. 21/2002-Cus, dated 01.03.2002.

- Investigation was conducted by the Department wherein it was revealed that out of 40500 pieces Quartz Clock Movements imported by the Noticee, only 20036 pieces were used in manufacture of clocks exported during the period 5/2005 to 10/2008. However the balance 20464 pieces imported were not utilized in the manufacture of Handicrafts for exports.

- During investigation, it was also revealed that the noticee has suppressed the fact that the imported Quartz Clock Movements (Analog) were not used in the manufacture of the Handicrafts for export with the intention to evade custom duty.

- Department alleged that the Noticee had violated condition no. 12 of the Exemption Notification. The Condition no. 12 provided that the goods imported duty free under Notification no. 21/2002-Cus were required to be used exclusively in the manufacturing of Handicrafts for export.

- Accordingly, Department issued show cause notice proposing to deny the benefit of Notification No. 21/2002-Cus for the remaining unutilised impugned goods and demanded duty for the same. It was also alleged that the impugned goods were liable for confiscation under Section 111 (o). Penalty under Section 114A and/or 112(a) of the Customs Act, 1962 was proposed to be imposed.

Contentions of Noticee:

¨ Noticee submitted that Notification No. 21/2002-Cus prescribes the condition that the imported goods are to be used for the manufacture of goods meant for export. Thus, only a user condition has been prescribed in the Notification. Noticee submitted that they had used the Quartz Clock Movements (Analog) imported by them for use in making their final product clock which was being exported by them. It was submitted that they had fulfilled the requirements prescribed in the condition no. 12 of the Notification No. 21/2002-Cus. Therefore the benefit of the said Notification cannot be denied or taken away from them.

¨ Noticee submitted that Notification No. 21/2002-Cus only prescribed a user condition but no time limit has been prescribed therein for use of the imported inputs in the manufacture of export goods. Therefore, merely because they have not yet utilised the said Quartz Clock Movements (Analog) does not mean that in the future they will not be utilizing the same for manufacture of their final product.

¨ It was submitted that there was delay in using the said imported inputs in making the final goods for export as their factory had closed down during the relevant time period. And their production had halted for some time. The other reason for non-utilisation was that the part of the order for their final product was cancelled by their foreign buyers.

¨ It was submitted that it was not their intention to not to use the said imported inputs but due to the above-stated reasons they have been unable to do so. They had every intention of using the said imported inputs for manufacture of our final goods which are to be exported in the future. Thus, there was no intention to violate the conditions prescribed in the Notification and benefit of the same cannot be denied to them.

¨ It was submitted that they have not acted with the intention to evade payment of customs duty. It was submitted that there was no willful or deliberate suppression of facts with intent to evade payment of duty. Therefore, the extended period cannot be invoked against the Noticee. Further, it was submitted that no interest could be recovered from them under the Section 28AB of the Customs Act, 1962.

¨ It is submitted that as they had every intention to use the said imported inputs for manufacture of their final product (clock) which will be exported in the future, the said imported inputs cannot be confiscated from them. Thus, the impugned goods cannot be confiscated under Section 111 (o) of the Customs Act, 1962.

Issue Involved:

The issue involved in this case was that

Whether there was non-fulfillment of prescribed actual user condition by the Noticee leading to denial of benefit of exemption under Notification No. 21/2002-Cus, dated 01.03.2010?

Decision of the Adjudicating Authority:

Ø The Adjudicating Authority found that out of the total quantity of Quartz Clock Movements imported by the Noticee, only 20036 pieces were used in manufacture of clocks exported during the period 5/2005 to 10/2008 and the balance 20464 pieces imported were not utilized in the manufacture of the handicrafts for export.

Ø The Adjudicating Authority held that as 20464 pieces imported of Quartz Clock Movements have not been used in the manufacture of Handicrafts for exports, the benefit of Exemption Notification is not available to the Noticee for the said quantity.

Ø The Adjudicating Authority further held the Exemption Notification No. 21/2002-Cus stipulates that the imported goods are to be utilized for the manufacture of handicrafts for export but at the same time no timeframe has been prescribed in the above mentioned notification regarding the utilization of the imported goods. Accordingly, it was noted that the Noticee had submitted that production in their factory was halted because of labour unrest for sometime. They have further stated their export orders were cancelled and to that effect they have endorsed correspondence between them and buyer which reveals that the part orders were cancelled.

Ø Further, the Adjudicating Authority observed that though the goods have been used in the manufacture of handicraft for export, but at the same time they have not been diverted/ sold for any other purpose. The unutilized imported goods are lying in the factory of the Noticee and have been accounted for properly.

Ø It was further found by the Adjudicating Authority that Noticee had paid the applicable duty alongwith interest on the unutilized goods as demanded in the Show Cause Notice.

Order of the Adjudicating Authority:

Accordingly, the Adjudicating Authority denied the benefit of Notification No. 21/2002-Cus on the unutilised quantity of imported quartz clock movements. The duty paid by the Noticee is appropriated towards the differential duty. The impugned Bill of Entries are to be assessed on merits.

As no act of omission and commission have been conducted by the Noticee, therefore, the impugned goods are held not liable to confiscation. The amount already paid by the Noticee is appropriated towards interest. No penalty imposed on the Noticee under provisions of Section 114 (A) and / or 112 (a) of the Customs Act, 1962.

Conclusion:

The Adjudicating Authority rightly held that there was no time limit prescribed in the exemption Notification for fulfilling the actual user condition. When delay is exporting the finished goods containing imported inputs was explained therefore, confiscation of the imported inputs could not be ordered. Especially when the imported inputs were not diverted to any other place and the importer-manufacturer had every intention to use them in manufacturing of their finished goods which is to be exported.

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PJ/CASE STUDY/2010-11/35
27 December 2010

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