2025 (5) TMI 1378 - SC - Customs

Eligibility for duty free credit entitlement scheme vide N/N. 53/2003-Cus. dated 01.04.2003 - import of crude degummed soyabean oil - Agricultural product or not - administrative circular No. 10/2004-Cus. dated 30.01.2004 could legally expand the exclusionary clause of the statutory notification No. 53/2003-Cus. dated 01.04.2003 by including all products derived from agricultural or dairy origin thereby curtailing the benefits under the duty free credit entitlement scheme or not - HELD THAT - Since the genesis of the present lis is the show- cause notice dated 30.08.2006 issued by the Assistant Commissioner Kandla it would be appropriate to initiate the analysis therefrom. The show-cause notice referred to the factum of importation of crude degummed soyabean oil falling under CTH 15071000 chargeable to appropriate tariff duty by the appellant. However the appellant filed two Bills of Entry dated 26.07.2006 and 27.07.2006 claiming benefit of the notification bearing No.53/2003-Cus. dated 01.04.2003 i.e. exemption from payment of various customs duties on the basis of the license issued by the DGFT for duty free import of goods specified in the license - appellant was called upon to show-cause as to why the duties chargeable/leviable for imported goods should not be charged under Section 28 of the Customs Act 1962 ( the Customs Act hereinafter) on the goods imported duty free and hit by the exclusion clause of the notification bearing No.53/2003. Appellant was also called upon to show cause as to why interest at appropriate rate on the aforesaid duties should not be charged under Section 28AB of the Customs Act. High Court did not non-suit the appellant on the ground of alternative remedy but proceeded to hear the challenge on merit. By the impugned judgment and order dated 05.08.2019 High Court held that the basic ingredient of crude degummed soyabean oil is soyabean which is admittedly an agricultural product - According to the test report unless the crude degummed soyabean oil is refined it cannot be used for human consumption. Therefore the High Court rejected the contention that in view of the process undertaken soyabean acquires a distinct marketable identity is without any merit. Finding of the Assistant Commissioner that crude degummed soyabean oil is an agricultural product cannot be faulted. A two-Judge Bench of this Court in Union of India Vs. Inter Continental 2008 (4) TMI 23 - SUPREME COURT was considering the question as to whether the end-use verification of the products is necessary for availing the benefit of concessional rate of duty. In that case the statutory notification bearing No.17/2001-Cus. dated 01.03.2001 provided for concessional rate of duty on crude palmolin oil. However as per Board s circular No.40/2001-Cus. dated 13.07.2001 end-use certificate was required to be produced for allowing such benefit. This came to be challenged by the assessee by filing a writ petition in the High Court questioning the direction to produce the end-use certificate which was stated to be a new condition to the statutory notification by way of a circular. Contention of the petitioner was that the circular sought to impose a limitation on the exemption notification or tried to whittle it down by adding a new condition beyond the notification. High Court accepted the writ petition by holding that the Board by issuing a circular subsequent to the notification could not have added a new condition thereby restricting the scope of the exemption notification. Imposing such a condition would tantamount to re-writing the notification or in other words legislating by circular which is not permissible in law. High Court held that the circular being contrary to the notification could not be sustained as it could not override the notification. This Court agreed with the view of the High Court. Whether crude degummed soyabean oil imported by the appellant is an agricultural product? - HELD THAT - On an analysis of the diagram describing the manufacturing process of the appellant High Court observed that the basic ingredient/root of the product is soyabean. It is not disputed even by the appellant that soyabean is an agricultural product. After referring to the contention of the appellant that after undergoing the process of manufacture the crude degummed soyabean oil becomes a distinct commodity High Court observed that though the process undertaken by the appellant may be termed as a manufacturing process but what is to be seen is that soyabean as an agricultural product is a primary product which undergoes a simple operation so as to make it more usable or saleable; it can in no way be said to acquire a distinct identity. Unlike eucalyptus oil soyabean on extraction of oil does not lose its identity. High Court relied on the test report placed on record to hold that unless the crude degummed soyabean oil is refined it cannot be used for human consumption. High Court therefore rejected the contention of the appellant that after going through the process as explained soyabean acquires a distinct marketable identity is without any merit and upheld the finding of the assessing authority that crude degummed soyabean oil is an agricultural product. In Union of India Vs. Delhi Cloth and General Mills Co. Ltd. 1962 (10) TMI 1 - SUPREME COURT a Constitution Bench of this Court held that the verb manufacture used as a word is generally understood to mean as bringing into existence a new substance howsoever minor in consequence the change may be. Manufacture implies a change but every change is not manufacture. Every change of an article is the result of treatment labour and manipulation. But something more is necessary to make it manufacture . There must be transformation; a new and different article must emerge having a distinctive name character or use. In the facts of that case this Court observed that appellants used to bring transformer oil and by removing impurities it was again made useable as transformer oil. Before and after the process the product was only transformer oil. That being so this Court held that it could not be said that a new and distinct commodity had come into existence consequent to the process undertaken by the appellant. It is unable to concur with the view expressed by the High Court that crude degummed soyabean oil is an agricultural product. Conclusion - i) The circular bearing No.10/2004 dated 30.01.2004 insofar it expands the exclusionary clause in the statutory notification No.53/2003 dated 01.04.2003 would have no legal consequence. ii) Crude degummed soyabean oil is a product different and distinct in character and identity from soyabean. iii) The process carried out by the appellant using soyabean as raw material and ending in the product crude degummed soyabean oil is manufacturing. iv) Crude degummed soyabean oil is not an agricultural product. v) The appellant would be entitled to the benefits under notification No.53/2003 dated 01.04.2003. Appeal allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

- Whether the administrative circular No. 10/2004-Cus. dated 30.01.2004 could legally expand the exclusionary clause of the statutory notification No. 53/2003-Cus. dated 01.04.2003 by including all products derived from agricultural or dairy origin, thereby curtailing the benefits under the duty free credit entitlement scheme.

- Whether crude degummed soyabean oil imported by the appellant qualifies as an agricultural product under the relevant statutory and policy framework.

- Whether the process of converting soyabean into crude degummed soyabean oil amounts to manufacture, resulting in a new and distinct product.

- Whether the imported crude degummed soyabean oil has the requisite nexus with the products exported by the appellant under the EXIM policy for entitlement under the duty free credit certificate.

- The validity of the demand of customs duty and interest imposed on the appellant by the Assistant Commissioner and upheld by the High Court.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Legality of Circular No. 10/2004-Cus. expanding the exclusionary clause of Notification No. 53/2003-Cus.

Relevant legal framework and precedents: Notification No. 53/2003-Cus., issued under Section 25(1) of the Customs Act, exempts certain goods imported under duty free credit entitlement certificates from customs duty, explicitly excluding agricultural and dairy products. Circular No. 10/2004-Cus. clarified that the exclusion includes all products derived from agricultural or dairy origin, including crude edible oil. The appellant challenged this circular as impermissibly expanding the exclusion.

Precedents such as Tata Teleservices Ltd. v. Commissioner of Customs and Union of India v. Inter Continental have established that an administrative circular cannot impose conditions or restrictions beyond those provided in a statutory notification, as that would amount to legislating by circular, which is impermissible. Similarly, Sandur Micro Circuits Ltd. reaffirmed that a circular cannot override or whittle down the effect of a statutory notification.

Court's interpretation and reasoning: The Court held that the circular, by expanding the exclusionary clause to include all products derived from agricultural or dairy origin, effectively curtailed the exemption granted by the statutory notification. This was not permissible as it amounted to rewriting the notification's conditions. Therefore, the circular had no legal effect to restrict the exemption beyond what was statutorily provided.

Application of law to facts: The Court concluded that the appellant was entitled to rely on the exemption as provided in the statutory notification and could not be denied benefits on the basis of the circular.

Conclusion: Circular No. 10/2004-Cus. dated 30.01.2004 could not legally expand the exclusionary clause in Notification No. 53/2003-Cus. and thus has no legal consequence in restricting the appellant's entitlement.

Issue 2: Whether crude degummed soyabean oil is an agricultural product

Relevant legal framework and precedents: The term 'agricultural product' is not defined in the EXIM policy or the Customs notification. The Court referred to dictionary definitions and judicial precedents concerning the meaning of 'agricultural product' and 'manufacture'. Key precedents include Union of India v. Delhi Cloth and General Mills Co., Deputy CST v. Pio Food Packers, Commissioner of Income Tax v. N.C. Budharaja & Co., and Jai Bhagwan Oil and Flour Mills v. Union of India.

These cases establish that for a product to be considered manufactured, it must undergo a process resulting in a new and distinct article with a different name, character, or use, recognized as such in trade. Conversely, simple or minor operations that do not produce a distinct new product do not amount to manufacture.

Court's interpretation and reasoning: The Court analyzed the manufacturing process of converting soyabean into crude degummed soyabean oil, which involves cleaning, cooking, flaking, solvent extraction, and distillation. The Court found that this process constitutes manufacture as it results in a new and distinct product, different in character and identity from the original soyabean.

The Court rejected the High Court's reasoning that crude degummed soyabean oil retains the identity of soyabean and is not fit for human consumption unless refined. The Court clarified that the test for manufacture is not whether the product is consumable but whether it is a distinct commodity recognized in trade.

Applying dictionary meanings and judicial interpretations, the Court held that crude degummed soyabean oil is not an agricultural product but a manufactured product distinct from soyabean, which is the agricultural raw material.

Application of law to facts: The process undertaken by the appellant meets the criteria for manufacture, and the resulting crude degummed soyabean oil is not the same as the agricultural product soyabean. Therefore, the exclusion of agricultural products under Notification No. 53/2003-Cus. does not apply to the imported crude degummed soyabean oil.

Conclusion: Crude degummed soyabean oil is not an agricultural product but a distinct manufactured commodity and thus eligible for exemption under the duty free credit entitlement scheme.

Issue 3: Nexus between imported goods and exported products under the EXIM policy

Relevant legal framework: The EXIM policy requires that goods imported under the duty free credit entitlement certificate must have a nexus with the products exported by the status holder. The appellant exported food products including soyabean meal extract and imported crude degummed soyabean oil.

Court's reasoning: The High Court had held that the imported crude degummed soyabean oil did not have a broad nexus with the exported products, particularly as the exported soyabean meal extract was different from the imported crude oil, and the latter was not fit for direct human consumption.

The Supreme Court, however, did not find it necessary to delve into this issue in detail, since the primary question of whether crude degummed soyabean oil was an agricultural product was dispositive. The Court noted that the imported product is classified as a food product under the Standard Input Output Norms (SION), as is the exported soyabean meal extract, indicating a nexus.

Conclusion: The Court did not make a definitive ruling on the nexus issue but implied that since crude degummed soyabean oil is a distinct product and classified as a food product, it does have the requisite nexus with the exported products.

Issue 4: Validity of the demand of customs duty and interest

Relevant legal framework: The Assistant Commissioner demanded customs duty and interest under Sections 28 and 28AB of the Customs Act on the ground that the imported crude degummed soyabean oil was an agricultural product excluded from exemption.

Court's reasoning: Since the Court held that the imported product is not an agricultural product and the circular expanding the exclusionary clause is invalid, the demand of duty and interest is unsustainable.

Conclusion: The demand of customs duty and interest raised against the appellant is set aside.

3. SIGNIFICANT HOLDINGS

"By way of the circular dated 30.01.2004, the Board could not have curtailed the benefits granted to the appellant under the statutory notification dated 01.04.2003 by expanding the scope of the exclusionary clause 'other than agricultural and dairy products'."

"The process carried out by the appellant using soyabean as raw material and ending in the product crude degummed soyabean oil is manufacturing."

"The true test for determining whether manufacture has taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognized in trade as a new and distinct commodity."

"Crude degummed soyabean oil is a product different and distinct in character and identity from soyabean."

"Crude degummed soyabean oil is not an agricultural product."

"Therefore, appellant would be entitled to the benefits under notification No.53/2003 dated 01.04.2003."

"The circular bearing No.10/2004 dated 30.01.2004 insofar it expands the exclusionary clause in the statutory notification No.53/2003 dated 01.04.2003 would have no legal consequence."

The Court allowed the appeal, set aside the impugned judgment and order of the High Court dated 05.08.2019, and the order passed by the Assistant Commissioner dated 09.01.2007, with no order as to costs.