2025 (7) TMI 227 - AT - Customs

EOU - Classification of imported goods - Exemption (Concessional rate of duty) Subject to Actual user condition for Manufacture of Goods - Import of bus bars - Appellant claims that goods were not bars but parts required for manufacture of switch gears and hence covered within chapter 85 of First Schedule to Customs Tariff Act 1975 and not against tariff item 7407 1030 of First Schedule to Customs Tariff Act 1975 as claimed - Jurisdiction for recovery of duty from non-eligibility for any reason - power to proper officer or not HELD THAT - It is found from the impugned order that reference has been made to N/N. 78/2017-Cus dated 13th October 2017 which amended the governing notification ibid and also the operationalizing of Customs (Import of Goods at Concessional Rate of Duty) Rules 2017 vide N/N. 68/2017-Cus (NT) dated 30th June 2017. The customs authorities were required to examine eligibility in terms of enumerated conditions for exemption and the classification of the goods which from the intent of N/N. 52/2003-Cus dated 31st March 2003 being assessment neutral and of no consequence warranted interference only upon proven diversion instead of actual use in manufacture. Assessment to duty whether at the rate prescribed for tariff item 7407 1030 or tariff item 8538 9000 of First Schedule to Customs Tariff Act 1975 was immaterial to exempting export oriented units (EOU) from payment of duty as the goods manufactured were in any case to be exported and to the extent permitted by the scheme in the Foreign Trade Policy (FTP) cleared domestically in form that it was not at the time of import. As far as the 169 bills entry for the period from July 2018 are concerned there is no allegation that the goods imported had been used other than as intended in the exemption notification. In the absence of breach of such condition there was no scope for recovery of any duties foregone at the time of import. There is no allegation of the goods having been cleared as such into the domestic market nor that the impugned goods were not utilized in the manufacture of goods exported by the appellant. The classification accepted at the time of import was interred for all time to come with deployment of goods for production. As far as the live consignment is concerned the provision in the exemption notification enables consequence for failure to meet post-importation conditions leaving scope neither for levy of duty nor for confiscation thereof at the threshold of Indian territory. Presumption of eventual violation of the conditions specified in N/N . 52/2003-Cus dated 31st March 2003 is not acknowledged in law and hinges on personal perception which is anathema. Neither is there any allegation that the impugned goods are not permitted for import in terms of the letter of permission (LoP) issued by the jurisdictional Development Commissioner and which is the touchstone for denial of exemption with consequent relevance to assessment to duty at the threshold - The impugned Rules are merely facilitative as are the procedures therein for claiming exemption and to be deployed if at all for detriment within the scope and extent of the Rules. The authority adjudicating the impugned notice had no jurisdiction in proceedings to revisit assessment in relation to alleged procedural disputation over Rules for operationalizing a scheme of manufacture and export by which an assessee was permitted subject to requirement for manufacture of permitted goods to import without any restriction on quantity or description. The charging of differential duty as well as the other detriments amounts to excess of jurisdiction and based on premises and suppositions which have neither authority of law to support nor judicial pronouncements to prop up. This is clearly a case of excess of jurisdiction by authorities vested with the empowerment to charge duties on goods imported into the country in accordance with law namely section 12 and section 14 of Customs Act 1962 and on non-conformity with threshold conditions imposed in any notification issued under section 25 of Customs Act 1962. The impugned order is set aside - Appeal allowed.

Summary

The core legal questions considered in this appeal include:

1. Whether the imported goods classified under tariff item 7407 1030 (copper bars excluding hollow bars) were liable for re-assessment and correctly classifiable under tariff item 8538 9000 (parts suitable for use solely or principally with apparatus of headings 8535, 8536 or 8537) of the First Schedule to the Customs Tariff Act, 1975.

2. Whether the appellant, an export-oriented unit (EOU) operating under the Foreign Trade Policy (FTP) and holding a letter of permission (LoP), complied with the conditions prescribed under the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017, and notification no. 52/2003-Cus dated 31st March 2003, to avail exemption from customs duty on imported goods.

3. Whether the jurisdictional customs authorities had the power to re-assess and recover differential duty and impose penalties under the Customs Act, 1962, based on alleged non-compliance with procedural requirements and classification disputes.

4. The legal effect of procedural safeguards and conditions under the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017, in the context of the EOU scheme and the impact of the GST regime on these provisions.

5. The applicability and interpretation of exemption notifications and related Customs Tariff Act provisions in the context of imported goods used in manufacture for export.

Issue-wise Detailed Analysis:

1. Classification of Imported Goods (Tariff Item 7407 1030 vs. 8538 9000):

The legal framework governing classification is primarily the General Rules for Interpretation (GRI), specifically GRI-1, which mandates classification to be determined according to the terms of the headings and any relative Section or Chapter Notes unless these require otherwise. The Court emphasized the primacy of the tariff headings and notes over titles or descriptions.

The jurisdictional customs authorities contended that the imported goods were not copper bars (CTH 7407 1030) but parts suitable for use principally with switchgear apparatus (CTH 8538 9000), based on notes to Section XV and exclusions in Section XVI of the Customs Tariff Act, 1975. The goods were alleged to be "copper busbars," which fall under chapter 85 and not chapter 74.

The appellant submitted supplier explanations distinguishing copper bars from copper busbars, asserting the former classification was correct. However, the customs authorities rejected these explanations citing supplier letters indicating the term "busbar" was used erroneously.

The Court examined the classification principles and found that goods used principally as parts for switchgear apparatus merit classification under tariff item 8538 9000. However, the Court also noted that the classification accepted at the time of import was copper bars under 7407 1030 and that the goods were used in manufacture as raw materials, not as finished parts, thus challenging the re-assessment.

2. Compliance with Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 and Notification No. 52/2003-Cus:

The appellant, operating as an EOU under FTP with a valid LoP, had submitted intimation under the 2017 Rules regarding the intended use of imported goods in manufacture of specified end products. The authorities alleged non-conformity with this intimation, thus rendering the exemption under notification no. 52/2003-Cus inapplicable.

The Court analyzed the nature and scope of the 2017 Rules, which were procedural safeguards designed to ensure proper use of imported goods for manufacture in the post-GST tax regime. These Rules require importers to furnish information and maintain records to monitor end-use, but do not alter substantive eligibility for exemption.

The Court noted that the EOU scheme had evolved from a heavily supervised regime to a more autonomous one, with the 2017 Rules facilitating procedural oversight without changing the fundamental exemption framework.

The Court found no allegation or evidence that the appellant had diverted the imported goods from use in manufacture or cleared them domestically without payment of duty. The goods were used as intended under the exemption notification and the LoP.

3. Jurisdiction and Power of Customs Authorities to Re-assess and Recover Duty:

The customs authorities invoked provisions under sections 111(m), 111(o), 112, 114A, 114AA, 125, and 28 of the Customs Act, 1962, to impose duty liability, penalties, confiscation, and fine. The authorities justified re-assessment on grounds of classification and procedural non-compliance.

The appellant challenged the jurisdiction of the customs authorities to re-assess classification and recover duty based on procedural non-compliance under the 2017 Rules, contending that the Rules are procedural and do not confer power to revisit classification or substantive eligibility.

The Court agreed with the appellant, holding that the 2017 Rules are facilitative procedural safeguards and do not alter the substantive exemption or classification accepted at import. The Court emphasized that the jurisdiction to recover duty arises only on proven diversion or breach of conditions, not on mere procedural lapses or re-classification based on suppositions.

4. Effect of GST Regime and Changes in Taxation on the EOU Scheme and Notifications:

The Court reviewed the amendments brought by notifications 59/2017-Cus and 78/2017-Cus, which incorporated integrated tax and compensation cess under the Customs Tariff Act and aligned procedural requirements with the GST regime.

The Court observed that these amendments were procedural and intended to maintain oversight in the changed tax environment without altering the fundamental exemption scheme under notification no. 52/2003-Cus.

The Court found that the appellant's compliance with the procedural requirements under the 2017 Rules was established and that the changes did not empower customs authorities to re-assess classification or deny exemption absent actual breach of conditions.

5. Interpretation of Exemption Notifications and Application to the Facts:

The Court examined notification no. 52/2003-Cus, which exempts duty on goods imported for use in manufacture of specified products by EOUs, subject to conditions. The Court emphasized that the exemption is assessment neutral and intended to facilitate manufacture for export.

The Court held that classification disputes do not affect exemption unless goods are diverted or not used in manufacture. The appellant's imports were consistent with the LoP and the notified scheme, and no diversion or domestic clearance without duty was alleged.

The Court rejected the customs authorities' approach of treating the imported goods as finished products ineligible for exemption, noting that such re-classification and duty recovery based on presumptions or procedural technicalities is impermissible.

Treatment of Competing Arguments:

The appellant argued for liberal interpretation of exemption in favor of EOUs, reliance on supplier explanations, and procedural nature of the 2017 Rules. The customs authorities emphasized strict compliance, classification under residual tariff heading 8538 9000, and power to recover duty and impose penalties.

The Court favored the appellant's arguments, underscoring the procedural character of the Rules, the absence of evidence of diversion, and the primacy of the LoP and notification in determining exemption. The Court disallowed re-assessment based on classification changes unsupported by factual breach.

Conclusions:

The Court concluded that the re-assessment and consequent duty recovery and penalties imposed by the customs authorities were without jurisdiction and based on unfounded premises. The classification adopted at import stood, and the appellant's compliance with procedural and substantive conditions was established.

The impugned orders imposing duty liability, penalties, confiscation, and fines were set aside, and the appeal was allowed.

Significant Holdings:

"The classification accepted at the time of import was interred for all time to come with deployment of goods for production."

"The Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017 is a framework that enables some level of supervisory control ... the procedural stipulations thereof are to be treated as merely procedural and nothing else."

"The authority adjudicating the impugned notice had no jurisdiction in proceedings to revisit assessment in relation to alleged procedural disputation over Rules for operationalizing a scheme of manufacture and export by which an assessee was permitted ... to import without any restriction on quantity or description."

"In the absence of breach of such condition, there was no scope for recovery of any duties foregone at the time of import."

"The charging of differential duty as well as the other detriments amounts to excess of jurisdiction and based on premises and suppositions which have neither authority of law to support nor judicial pronouncements to prop up."

The core principles established include:

• Classification for customs duty purposes is governed primarily by the terms of tariff headings and notes, and cannot be revised post-import absent clear evidence of misclassification or diversion.
• Procedural rules under the Customs (Import of Goods at Concessional Rate of Duty) Rules, 2017, are designed for oversight and record-keeping but do not confer jurisdiction to re-assess or deny substantive exemptions.
• Exemption notifications for EOUs must be interpreted liberally to facilitate export-oriented manufacture, and duty recovery is permissible only upon proven non-compliance or diversion, not on presumptions or procedural technicalities.
• Customs authorities cannot impose penalties, confiscation, or recover differential duty without jurisdiction and factual basis.

Final determinations were that the appellant's goods were correctly classified under tariff item 7407 1030 at import, the procedural compliance under the 2017 Rules was adequate, and the imposition of duty and penalties by customs authorities was set aside for lack of jurisdiction and factual foundation.