2025 (6) TMI 1283 - AT - Customs

Recovery of customs duty on inputs and packing materials procured by an Export Oriented Unit (EOU) - recovery of duty on destroyed goods that were procured duty-free under the EOU scheme and destroyed as per mandatory pharmaceutical industry protocols - entitlement of benefit of N/N. 52/2003 dated 31st March 2003 - HELD THAT - From the manner in which the adjudicating authority has dealt with the issue of inputs and packing materials imported but not used in manufacture and admittedly destroyed in the factory it would appear that the scheme and its manner of implementation through the relevant provisions of Customs Act 1962 and governing notification issued under section 25 of Customs Act 1962 has been misconstrued. The scheme of export promotion through export oriented units (EOU) had been in existence for several decades and was aligned one way or another with the provisions of Customs Act 1962. The scheme underwent several changes that in many ways paralleled the liberalization of control over manufacturing units and the relevant notifications issued from time to time reflected the evolution. The scheme of exemption in the impugned notification requires compliance with conditions and one among those is the execution of bond upon which a unit issued with the letter of permission (LoP) becomes eligible for benefits of exemption. Conditions in the bond are not the conditions contingent upon which exemption is granted; bond as prescribed should be furnished - The exemption in terms of impugned notification is granted by the assessing officer under section 17 of Customs Act 1962. Likewise the condition in the bond for payment of duty leviable on the goods and the interest charged at the rate as specified in the notification from the date of import of the said goods till the payment of duty is contingent upon the said officer not having been satisfied about usage of goods in connection with production and packing of the goods and in accordance with standard input output norms (SION) for export or cleared for home consumption within a period of three years from the date of import or procurement. Investigation was taken up in March 2012 of goods purportedly imported between October 2007 and October 2009. Therefore satisfaction of the proper officer would have to be of the goods for the said period to the extent that the standard input output norms (SION) not being so compliant. It was also inappropriate on the part of the Commissioner of Customs to invoke the provisions of bond executed only as threshold condition to be eligible for availment of N/N. 52/2003-Cus dated 31st March 2003 and obliging the executor to conform to the terms of the bond upon demand without either notice of intent or justification for appropriation of jurisdiction. It is clear from the show cause notice that no such demand was made on the appellant; nor was any proposal for demand under section 28 of Customs Act 1962 confirmed in adjudication proceedings to be recovered through bond. The adjudicating authority has acted in excess of jurisdiction. The prescriptions in section 142 of Customs Act 1962 refer either to Assistant Commissioner or Deputy Commissioner as proper officer . It was incumbent upon the adjudicating authority to make it clear in the impugned order as to the manner in which the functions of proper officer had been appropriated by him in accordance with law. The absence of that taints the entire process of adjudication. Conclusion - i) No duty is recoverable on inputs and packing materials destroyed in compliance with pharmaceutical regulations and FTP provisions. ii) The adjudicating authority s reliance on rescinded notifications and warehousing requirements was incorrect. iii) Invocation of bonds without confirmed demand and proper proceedings was beyond jurisdiction. The impugned order cannot be sustained and is consequently set aside - appeal allowed.

Summary

The core legal questions considered by the Tribunal revolve around the recovery of customs duty on inputs and packing materials procured by an Export Oriented Unit (EOU) and subsequently destroyed pursuant to pharmaceutical industry regulations, and the procedural propriety of invoking bonds executed under the Customs Act for recovery of such duties. Specifically, the issues include: (i) whether duty is recoverable on destroyed goods that were procured duty-free under the EOU scheme and destroyed as per mandatory pharmaceutical industry protocols; (ii) the applicability and interpretation of the relevant Customs notifications and the Foreign Trade Policy (FTP) provisions concerning destruction and remission of duty; (iii) the correctness of the adjudicating authority's reliance on bonds executed under the Customs Act for recovery without proper initiation of proceedings under the appropriate statutory provisions; and (iv) the procedural and jurisdictional validity of the impugned order, including invocation of extended period of limitation and the role of standard input-output norms (SION) in assessing duty liability.

Regarding the first issue, the Tribunal examined the legal framework under the Customs Act, 1962, the Central Excise Act, 1944, and the relevant notifications issued under these statutes, particularly Notification No. 52/2003-Cus dated 31st March 2003. The Court noted that the appellant, as an EOU, was entitled to procure inputs and packing materials duty-free under the FTP and the governing notifications, subject to conditions including proper utilization within stipulated time frames and adherence to SION. The appellant's contention that destroyed goods, mandated by pharmaceutical industry regulations due to shelf-life and quality control requirements, should not attract duty liability was supported by provisions in the FTP (para 6.31) allowing destruction of rejected raw materials and packing materials without payment of duty upon intimation to customs authorities. The Tribunal referred to minutes of a meeting of 100% EOUs chaired by the Commissioner of Customs, Bangalore, which acknowledged the legitimacy of destruction in the pharmaceutical industry and its coverage under the notification as waste and scrap eligible for duty remission.

The Court found that the adjudicating authority misconstrued the scheme by imposing duty liability on destroyed goods without questioning the legitimacy of destruction or considering the FTP provisions permitting destruction with remission of duty. It highlighted that the notification and the Customs Act provisions do not envisage recovery of duty on goods legitimately destroyed within the EOU premises, especially when destruction is mandated by law and duly intimated. The Tribunal emphasized that the recovery of duty presupposes clandestine clearance or diversion of goods, which was not established on the facts since the goods were destroyed. Therefore, the application of the law to facts favored the appellant's position that no duty liability arose on destroyed inputs and packing materials.

On the issue of invocation of bonds for recovery, the Tribunal analyzed the relevant statutory provisions under the Customs Act, particularly sections 28 and 142. It was submitted on behalf of the appellant that bonds executed under the Customs Act can only be invoked when proceedings for recovery under section 142 are initiated and that the adjudicating authority erred by enforcing the bond without confirming a demand or initiating proper recovery proceedings. The Tribunal relied on precedents which held that enforcement of bonds without initiation and confirmation of demand under the appropriate statutory provisions is impermissible. The Court observed that the impugned order failed to clarify the jurisdictional basis for invoking the bond and that the adjudicating authority had effectively dropped the proceedings initiated under section 28 without formally discontinuing them, thereby creating procedural irregularity.

The Tribunal further noted that the bond is a threshold requirement for availing exemption but does not itself constitute a condition upon which exemption is granted. Breach of other conditions in the notification would warrant recovery through proper proceedings under section 28. The adjudicating authority's failure to proceed under section 28 and instead seek recovery through bond enforcement was held to be beyond its jurisdiction. The Court underscored that section 142 recovery provisions apply only when a confirmed demand exists and that the adjudicating authority did not make any such demand in the impugned order.

Regarding the role of standard input-output norms (SION), the Tribunal acknowledged that these norms serve as a control mechanism to prevent diversion of duty-free imported goods under the EOU scheme. However, it clarified that SION are not intended to impose quantitative restrictions on imports but to facilitate reconciliation and detection of diversion. The adjudicating authority's mechanical application of SION to fasten duty liability on destroyed goods was found to be misplaced, especially since the goods were destroyed and not cleared clandestinely. The Tribunal held that exceeding the tolerance limits prescribed in the notification does not automatically give rise to duty liability if the excess goods have been legitimately destroyed in accordance with industry norms and FTP provisions.

In addressing competing arguments, the Tribunal gave due consideration to the respondent's contention that the appellant procured inputs in excess of requirements and failed to regularize storage beyond prescribed periods, thereby causing loss of customs duty. However, the Court found that the notification governing exemption had superseded earlier provisions requiring warehousing and that the adjudicating authority's reliance on rescinded notifications was erroneous. The Tribunal also rejected the respondent's argument that destruction was necessitated by lack of diligence, holding that destruction mandated by pharmaceutical regulations cannot be equated with negligence or misuse.

The Tribunal concluded that the impugned order was unsustainable both on merits and jurisdictional grounds. It found that the adjudicating authority had misconstrued the scheme, failed to properly apply the relevant legal provisions, and acted beyond its jurisdiction by invoking bonds without confirmed demand and proper proceedings. The Court set aside the impugned order and allowed the appeal.

Significant holdings include the following verbatim excerpts encapsulating the Tribunal's legal reasoning:

"The goods which have not been cleared for home consumption, either in its finished form or in the form as imported, are not liable to duties of customs; the destruction of goods, which is undisputed, precludes any consequence of non-compliance with the norms and negates presumption of clandestine removal."

"The adjudicating authority has acted in excess of jurisdiction. The transformation of proceedings under section 28 of Customs Act, 1962 into another proceedings, which has its nearest approximation in section 142 of Customs Act, 1962 and also procedural prescription set out thus, has no authority under law without a confirmed demand."

"The 'standard input output norms (SION)' serve many purposes and not least of which is control of the goods imported for use in manufacturing process... the norms were not intended to restrict import as there was no quantitative target to be fulfilled but as a measure of calibration in the event of suspicion that goods had not been exported but diverted either after manufacture or, even, as such."

Core principles established include: (i) destruction of inputs and packing materials mandated by pharmaceutical industry protocols and permitted under the FTP does not attract duty liability; (ii) recovery of duty on destroyed goods is impermissible absent evidence of clandestine clearance or diversion; (iii) invocation of bonds executed under the Customs Act for recovery requires initiation of proper proceedings and confirmed demand under section 142 and cannot substitute for adjudication under section 28; (iv) standard input-output norms are tools for control and reconciliation and not quantitative restrictions imposing automatic duty liability; and (v) procedural and jurisdictional propriety must be observed in recovery proceedings, including clear identification of the 'proper officer' and statutory basis for enforcement.

Final determinations on each issue are: (a) no duty is recoverable on inputs and packing materials destroyed in compliance with pharmaceutical regulations and FTP provisions; (b) the adjudicating authority's reliance on rescinded notifications and warehousing requirements was incorrect; (c) invocation of bonds without confirmed demand and proper proceedings was beyond jurisdiction; and (d) the impugned order is set aside and the appeal allowed.