2025 (5) TMI 2141 - AT - Customs

Non-fulfilment of export obligation - zero duty EPCG Authorization - issuance of two Show cause notices - confiscation of the capital goods/machinery under sections 111(o) and 111(j) - payment of redemption fine - Demand of customs duty with interest and penalty - invocation of extended period under section 28 of the Customs Act - suppression of material facts - intention to evade payment of duty - violation of the condition of the Exemption Notification and the Foreign Trade Policy - HELD THAT - It provides that the export obligation shall be over and above the average level of exports achieved by the importer in the preceding three licensing years for the same and similar products within the overall export obligation. The first proviso stipulates that upto 50% of the export obligation may also be fulfilled by export of other goods manufactured or services provided by the importer or his group company or managed hotels which has the EPCG Authorization subject to the condition that in such cases additional export obligation imposed shall be over and above the average exports achieved by the importer in preceding three years. The second proviso further stipulates that in case of exports of goods relating to Sericulture the importer shall not be required to maintain the average level of exports. This definition of Export Promotion contained in the Explanation has no connection with the requirement of fulfilling the requirements contained in clause (7) of the Exemption Notification. The submission advanced by the learned counsel for the appellant is therefore misconceived. As would be seen from the calculation chart relating to duty foregone an amount of Rs. 5, 68, 072/- towards duty forgone has been deducted as the said machine was not installed in the factory premises. The duty foregone thus came to Rs. 66, 73, 239/-. 50% of this amount has been confirmed for the first four years and the remaining 50% for the next two years with interest at the rate of 15% as per the provisions of the Exemption Notification read with section 143 of the Customs Act and the conditions enumerated in the surety bond executed by the appellant at the time of importation of the said machine. The Commissioner was therefore justified in confirming the demand of customs duty proposed in the two show cause notices with interest. The impugned order also confirms customs duty of Rs. 5, 68, 072/- in respect of the machinery which is said to have been diverted/sold without putting it to use in the manufacturing process. According to the appellant the machinery was never cleared and was still lying at Nava Sheva Port. No document has placed by the department to show that the said machine was cleared by the appellant. Thus the said machine was not diverted or sold by the appellant in contravention of the Exemption Notification. In such circumstances customs duty of Rs. 5, 68, 072/- could not have been confirmed under section 28(4) of the Customs Act. The impugned order also confiscates the said machinery under sections 111(j) and 111(o) of the Customs Act for the reason that the appellant had contravened the provisions of Customs Act. As the duty could not have been confirmed the confiscation of goods under sections 111(j) and 111(o) of the Customs Act is not justified. The impugned order also confirms the duty demand of Rs. 18, 69, 140/- with interest under section 28(4) of the Customs Act as two machines were cleared at zero duty in excess of the bond amount. It would therefore have to be seen whether the Commissioner was justified in invoking the extended period of limitation. For this it would have to be seen whether the appellant had suppressed material facts with an intention to evade payment of duty. The appellant may have exceeded the duty foregone limit prescribed in the EPCG Authorization by an amount of Rs. 18, 69, 140/- but this fact could have been checked by the customs authority as they had the relevant documents but the goods were cleared. In the absence of any suppression on the part of the appellant with an intention to evade payment of duty the extended period of limitation could not have been invoked. In such circumstances neither penalty under section 114A of the Customs Act could have been imposed nor the goods could have been confiscated under section 111(o) of the Customs Act. Thus the appeals are partly allowed. The confirmation of the demand of customs duty proposed in the show cause notices for not fulfilling the requirements of the Exemption Notification with interest is upheld. However the penalty imposed under section 117 of the Customs Act is set aside. The confirmation of customs duty of Rs. 5, 68, 072/- is set aside and the confiscation of the goods under sections 111(j) and 111(o) of the Customs Act is set aside. The confirmation of duty demand of Rs. 18, 69, 140/- with interest under section 28(4) of the Customs Act is set aside. The imposition of penalty under section 114A and confiscation of goods under section 111(o) of the Customs Act is set aside. The confiscation of machinery valued at Rs. 2, 67, 89, 292/- under section 111(o) of the Customs Act is set aside. Penalty of Rs. 3, 33, 662/- imposed upon the appellant and D.S. Kasare under section 112(a)(ii) of the Customs Act is set aside. The impugned order dated 22.01.2019 passed by the Commissioner is set aside only to the extent indicated above.

Summary

Issues Presented and Considered

The core legal questions addressed by the Tribunal include:

• Whether the appellant was obligated to fulfill 50% of the export obligation within the first four years under the EPCG Authorization and the Exemption Notification, particularly in light of the exemption relating to sericulture products from maintaining average export levels;
• Whether the show cause notices demanding customs duty with interest and penalties for non-fulfillment of export obligations were valid and timely, including the question of limitation and invocation of extended period under section 28 of the Customs Act;
• Whether the capital goods imported under the EPCG Authorization were diverted or sold in contravention of the terms of the Exemption Notification and Customs Act, thus justifying recovery of customs duty and confiscation of goods under sections 111(j) and 111(o) of the Customs Act;
• Whether the appellant exceeded the duty foregone limit under the EPCG Authorization and if so, whether the demand for excess duty was valid and within limitation;
• Whether penalties under sections 112(a)(ii), 114A, and 117 of the Customs Act were rightly imposed on the appellant and its Director;
• Whether confiscation of the imported capital goods and machinery was justified under the Customs Act provisions;
• The applicability and interpretation of the relevant provisions of the Exemption Notification No. 102/2009-Cus dated 11.09.2009 and the Foreign Trade Policy (FTP) including the Handbook of Procedures;
• Whether the appellant's plea of inability to fulfill export obligations due to non-availability of promised subsidies from Central and State Governments could excuse non-compliance and penalties.

Issue-wise Detailed Analysis

1. Obligation to Fulfill Export Requirements under EPCG Authorization and Exemption Notification

Legal Framework and Precedents: The EPCG scheme, governed by the Exemption Notification dated 11.09.2009 and the Foreign Trade Policy, mandates that importers execute a bond and fulfill export obligations equivalent to six times the duty saved on imported capital goods within six years. The export obligation is structured in two blocks: 50% within the first four years and 50% in the subsequent two years. The Explanation in the Notification defines 'Export Promotion' and exempts certain sectors, including sericulture, from maintaining average export levels.

Court's Interpretation and Reasoning: The Tribunal emphasized that the clause requiring fulfillment of export obligation in two blocks is distinct and independent from the definition of 'Export Promotion' which addresses the average export level requirement. The exemption from maintaining average export levels for sericulture does not absolve the appellant from fulfilling the export obligation proportionately within the stipulated time blocks. The Tribunal rejected the appellant's contention that the first show cause notice was premature and that the average export level exemption applied to the timing and quantum of export obligation fulfillment.

Application of Law to Facts: The appellant failed to fulfill 50% of the export obligation within the first four years (expiring 08.12.2015 with grace period ending 07.03.2016) and the remaining 50% in the next two years (expiring 07.12.2017 with grace period ending 06.03.2018). The appellant did not submit evidence of export fulfillment or pay proportionate customs duty with interest within the prescribed timelines, violating the conditions of the Exemption Notification and bond.

Conclusions: The Tribunal upheld the demand of customs duty with interest for non-fulfillment of export obligations as per the EPCG scheme and Exemption Notification.

2. Validity and Timeliness of Show Cause Notices and Invocation of Extended Limitation Period

Legal Framework: Section 28 of the Customs Act provides for recovery of customs duty along with interest if export obligations are not fulfilled. The extended period under section 28(4) can be invoked where there is suppression of facts or misdeclaration.

Court's Reasoning: The first show cause notice dated 28.02.2017 was issued after the expiry of the first block and grace period, and the second notice dated 18.09.2018 after the second block and grace period. The Tribunal found no merit in the appellant's claim that the notices were time-barred as they were issued within the prescribed timelines after expiry of the respective blocks and grace periods.

Regarding invocation of extended limitation for excess duty demand: The Tribunal held that although the appellant exceeded the duty foregone limit by Rs. 18,69,140/-, there was no evidence of suppression or intent to evade duty. The customs authorities had knowledge and cleared the goods, thus extended limitation and penalties under section 114A were not justified.

Conclusions: The show cause notices for non-fulfillment of export obligations were valid and timely. However, the demand for excess duty under extended limitation was set aside for lack of suppression or evasion.

3. Allegation of Diversion or Sale of Imported Capital Goods and Related Duty Demand and Confiscation

Legal Framework: Sections 111(j) and 111(o) of the Customs Act provide for confiscation of imported goods if conditions of importation are contravened, including diversion or unauthorized sale before fulfillment of export obligations. Section 28(4) mandates recovery of customs duty with interest where such contraventions occur.

Court's Interpretation and Reasoning: The department alleged that one machine (Bill of Entry No. 7712074 dated 21.08.2012) was diverted or sold without installation and fulfillment of export obligations. The appellant claimed the machine was never cleared from Customs and remained at Nhava Sheva port. The Tribunal noted the absence of conclusive evidence from the department proving clearance or diversion. The Chartered Engineer's certificate and physical verification were inconclusive, and the appellant's documentary evidence was unchallenged. The letter from the freight forwarder listing the Bill of Entry was not sufficient to establish diversion conclusively.

Application of Law to Facts: Without proof of clearance or diversion, the customs duty demand of Rs. 5,68,072/- and confiscation under sections 111(j) and 111(o) could not be sustained.

Conclusions: The Tribunal set aside the customs duty demand and confiscation relating to this machine.

4. Excess Duty Benefit Claimed Beyond EPCG Authorization Limit

Legal Framework: Customs duty must be paid on imports exceeding the duty foregone limit specified in the EPCG Authorization. Section 28(4) applies for recovery, and penalties may be imposed if there is suppression or evasion.

Court's Reasoning: The appellant cleared two machines at zero duty exceeding the authorized limit by Rs. 18,69,140/-. However, the Tribunal found that the customs authorities had knowledge and approved the clearances. There was no concealment or suppression by the appellant. Therefore, extended limitation and penalties under section 114A were not applicable.

Conclusions: The demand for excess duty and penalties related to these machines was set aside.

5. Penalties Imposed on Appellant and Director

Legal Framework: Penalties under sections 112(a)(ii), 114A, and 117 of the Customs Act are imposed for improper importation, suppression, and contravention of provisions where no specific penalty is provided.

Court's Interpretation and Reasoning: The penalty under section 117 was imposed for contravention of the Exemption Notification and bond conditions due to non-fulfillment of export obligations. The Tribunal found that penalty under section 117 could not be imposed where the appellant was not at fault or where conditions were not violated intentionally. The penalty under section 112(a)(ii) was imposed on the Director for alleged improper importation and failure to extend bank guarantee. Since confiscation was set aside, penalty under section 112(a)(ii) was also not sustainable. Penalty under section 114A was set aside due to absence of suppression.

Conclusions: Penalties under sections 117, 112(a)(ii), and 114A were set aside.

6. Confiscation of Capital Goods and Machinery

Legal Framework: Sections 111(j) and 111(o) authorize confiscation if goods are diverted, sold, or conditions of importation violated.

Court's Reasoning: Confiscation was ordered for machinery allegedly diverted or sold and for non-fulfillment of export obligations. The Tribunal found no discussion or justification in the impugned order for confiscation of machinery valued at Rs. 2,67,89,292/-. Given the lack of evidence of diversion and the setting aside of duty demand on the disputed machine, confiscation was not justified.

Conclusions: Confiscation orders under sections 111(j) and 111(o) were set aside.

Significant Holdings

"Clause (7) of the Exemption Notification clearly requires the appellant to fulfill the export obligation equivalent to six times the duty saved on the goods imported within a period of six years from the date of issue of the Authorization. It also provides the manner in which the proportions of total export obligation have to be fulfilled. 50% of the export obligation has to be fulfilled within the block of first to four year and the remaining 50% during the block of fifth to sixth year."

"The definition of 'Export Promotion' contained in the Explanation has no connection with the requirement of fulfilling the requirements contained in clause (7) of the Exemption Notification. The submission advanced by the learned counsel for the appellant is, therefore, misconceived."

"It is a settled position in law that an exemption notification has to be construed strictly and if the conditions of exemption are not satisfied, the benefit cannot be extended."

"In the absence of any suppression on the part of the appellant with an intention to evade payment of duty, the extended period of limitation could not have been invoked. In such circumstances neither penalty under section 114A of the Customs Act could have been imposed nor the goods could have been confiscated under section 111(o) of the Customs Act."

"No document has been placed by the department to show that the said machine was cleared by the appellant. Thus, the said machine was not diverted or sold by the appellant in contravention of the Exemption Notification. In such circumstances customs duty of Rs. 5,68,072/- could not have been confirmed under section 28(4) of the Customs Act. The impugned order also confiscates the said machinery under sections 111(j) and 111(o) of the Customs Act for the reason that the appellant had contravened the provisions of Customs Act. As the duty could not have been confirmed, the confiscation of goods under sections 111(j) and 111(o) of the Customs Act is not justified."

"Penalty under section 112(a)(ii) of the Customs Act can be imposed for improper importation of goods by any person who, in relation to any goods, does or omits to do any act which act or omission would render such goods liable to confiscation. In the present case, confiscation of goods has been set aside. Penalty under section 112(a)(ii) of the Customs Act could not, therefore, have been imposed upon the appellant."

Final determinations included upholding the demand of customs duty with interest for non-fulfillment of export obligations, setting aside penalties under sections 117, 112(a)(ii), and 114A, setting aside customs duty demand and confiscation related to the allegedly diverted machine, setting aside demand for excess duty and related penalties due to lack of suppression, and setting aside confiscation of machinery valued at Rs. 2,67,89,292/- due to lack of justification.