2025 (5) TMI 424 - HC - Customs

Classification of the imported Seaweed Extract - to be classified under Customs Tariff Heading (CTH) 1212 29 10 or CTH 3101 00 99? - non-furnishing of documents relied upon in the Show Cause Notice prior to passing the adjudication order - violation of principles of natural justice - HELD THAT - The very same goods of the Petitioner have been classified under CTH 3101 by the Commissioner of Customs (NS-I) JNCH (vide his order dated 30th April 2019) and the said order has been duly reviewed and accepted by the Review Committee of Chief Commissioners of Customs under the provisions of Section 129D of the Customs Act 1962 and has not been challenged. Though these orders have been referred to whilst recording the submissions of the Petitioner there is absolutely no finding and/or reasoning in relation to these orders and why the present Commissioner is taking a different view. The impugned order is completely silent on this aspect. This is yet another reason why the impugned order requires interference. The Testing Authority has in fact answered a query which is quite telling. One query raised by the Department was whether the goods of the Petitioner were an Organic Fertilizer and which was answered in the affirmative. This Test Report also finds no mention in the impugned order which is another reason why we are inclined to interfere with the impugned order. Conclusion - The impugned order has been passed without furnishing the documents relied upon in the Show Cause Notice. On this ground alone it would be justified in setting aside the impugned order. The impugned order cannot be sustained and would have to be set aside - matter remanded back to the Adjudicating Authority for giving a De Novo hearing to the Petitioner after supplying the documents referred to in the SCN and thereafter pass a reasoned order - petition allowed by way of remand.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court in this matter are:

(a) Whether the impugned Order-in-Original dated 18th February 2025, confirming the differential duty demand of Rs. 13.83 crores under Section 28(4) of the Customs Act, 1962, is legally valid and sustainable, particularly given the classification of the imported Seaweed Extract under Customs Tariff Heading (CTH) 1212 29 10 instead of CTH 3101 00 99.

(b) Whether the extension of the adjudication period granted by the Chief Commissioner of Customs on 10th January 2024 is lawful and proper.

(c) Whether the principles of natural justice were complied with, specifically regarding the non-furnishing of documents (notably the Analytics Report) relied upon in the Show Cause Notice prior to passing the adjudication order.

(d) Whether the prior classification orders and test reports, which classified the Seaweed Extract under CTH 3101 00 99 as an organic fertilizer, have been properly considered and reasoned upon by the adjudicating authority.

(e) Whether the exclusionary clause under Chapter Note 5(c) to Chapter 12 of the Customs Tariff, which excludes certain products from classification under Chapter 12, applies to the Seaweed Extract imported by the Petitioner.

(f) Whether the Petitioner is entitled to clearance of future consignments provisionally pending fresh adjudication.

2. ISSUE-WISE DETAILED ANALYSIS

(a) Legality and Validity of the Impugned Order Confirming Differential Duty Demand

Relevant Legal Framework and Precedents: The adjudication and classification of imported goods are governed by the Customs Act, 1962, specifically Section 28(4) which allows demand of differential duty if misclassification is found, and Section 28AA which provides for interest on delayed payment. The Customs Tariff Act, 1975, along with its Chapter Notes, govern classification. The principles of natural justice require that a party be furnished with documents relied upon against it before an adverse order is passed.

Court's Interpretation and Reasoning: The Court observed that the impugned order classified the Seaweed Extract under CTH 1212 29 10, which covers Locust beans, Seaweeds and other Algae, instead of CTH 3101 00 99, which covers Animal or Vegetable Fertilizers. This classification led to a demand of differential duty amounting to Rs. 13.83 crores.

The Court noted that the impugned order was passed without furnishing the Analytics Report 24/2022-23 dated 15th September 2022, which was a key document relied upon in issuing the Show Cause Notice. This omission was held to be a breach of natural justice, justifying setting aside the order.

Further, the Court highlighted that the impugned order failed to address or distinguish prior classification orders passed by the Commissioner of Customs (NS-I), JNCH dated 30th April 2019, and accepted by the Review Committee of Chief Commissioners under Section 129D, which had classified the same goods under CTH 3101 00 99. The impugned order was silent on reasons for deviating from these prior authoritative decisions, which was a significant flaw.

Additionally, the Court pointed out that test reports obtained after issuance of the Show Cause Notice but before passing the impugned order categorically stated that the product was an "organic fertilizer." These test reports were not referred to or considered in the impugned order, further undermining its validity.

Key Evidence and Findings: The Analytics Report, though not furnished, was the basis for the Show Cause Notice. The prior classification order dated 30th April 2019 and the Review Committee's acceptance of it were unchallenged and binding. The test report dated 10th February 2024 confirmed the product as an organic fertilizer, with detailed chemical analysis excluding presence of plant growth regulators, supporting classification under CTH 3101.

Application of Law to Facts: The Court applied the principles of natural justice requiring disclosure of documents relied upon. It also applied the doctrine of consistency and reasoned decision-making, requiring the adjudicating authority to consider and explain departure from prior classification orders. The exclusionary clause under Chapter Note 5(c) was noted but not reasoned upon in the impugned order, which the Court found deficient.

Treatment of Competing Arguments: The Petitioner argued breach of natural justice, ignoring prior classification orders, and ignoring test reports. The Respondents supported the impugned order. The Court sided with the Petitioner, emphasizing procedural fairness and reasoned decision-making.

Conclusion: The impugned order was set aside for breach of natural justice, failure to consider binding prior orders and relevant test reports, and lack of reasoning on exclusionary provisions.

(b) Legality of Extension of Adjudication Period

Relevant Legal Framework: The Customs Act allows extension of adjudication period by the Chief Commissioner of Customs to complete proceedings.

Court's Reasoning: The Court noted the extension order dated 10th January 2024 was challenged but did not elaborate on its legality. Since the extension was not the primary focus and no detailed submissions were recorded, the Court did not interfere with this order.

Conclusion: No interference was made with the extension order; the issue remains open for adjudication.

(c) Compliance with Principles of Natural Justice

Legal Framework: Natural justice mandates that a party must be given an opportunity to know and respond to all evidence and documents relied upon before an adverse order is passed.

Findings: The Analytics Report, a key document relied upon in the Show Cause Notice, was not furnished to the Petitioner before passing the impugned order.

Conclusion: This non-furnishing constituted a breach of natural justice, justifying setting aside the impugned order and remanding for fresh hearing after supplying all documents.

(d) Consideration of Prior Classification Orders and Test Reports

Legal Framework: Consistency in classification and reasoned decision-making are required under administrative law. Prior binding decisions under Section 129D of the Customs Act must be considered unless cogent reasons are given for departure.

Findings: The prior classification dated 30th April 2019 and accepted by the Review Committee classified the product under CTH 3101 00 99. The impugned order failed to provide any reasoning for departing from this settled position.

Test reports obtained after the Show Cause Notice confirmed the product as an organic fertilizer, yet these were ignored in the impugned order.

Conclusion: The failure to consider and reason on prior orders and test reports rendered the impugned order unsustainable.

(e) Applicability of Exclusionary Clause under Chapter Note 5(c) to Chapter 12

Legal Framework: Chapter Notes provide interpretative guidance on classification. Note 5(c) excludes certain products from Chapter 12.

Findings: Though the impugned order referred to this Chapter Note, it did not provide any reasoning as to why the exclusion did not apply to the Petitioner's Seaweed Extract.

Conclusion: The absence of reasoning on this exclusionary clause was a further deficiency requiring interference.

(f) Clearance of Future Consignments Pending Fresh Adjudication

Court's Direction: Pending fresh adjudication, future consignments of the Seaweed Extract shall be provisionally released within two weeks of furnishing a bond in the format required by Customs. The Customs Department is directed not to insist on any security beyond this bond, such as bank guarantees.

Rationale: This direction was based on the prior classification history and to avoid undue hardship to the Petitioner during pendency of proceedings.

3. SIGNIFICANT HOLDINGS

The Court held:

"The impugned order has been passed without furnishing the documents relied upon in the Show Cause Notice... On this ground alone, we would be justified in setting aside the impugned order."

"Though these orders have been referred to whilst recording the submissions of the Petitioner, there is absolutely no finding and/or reasoning in relation to these orders and why the present Commissioner is taking a different view. The impugned order is completely silent on this aspect."

"All such test reports have recorded that the said Product is an 'organic fertilizer'. However, the aforesaid test reports find no mention in the impugned order which is another reason why we are inclined to interfere with the impugned order."

"We direct that the Adjudicating Authority shall also take into consideration the earlier orders passed in the case of the Petitioner, classifying the said SEAWEED EXTRACT under CTH 3101 and give reasons as to why the Adjudicating Authority is differing from those decisions, if it chooses to do so."

"The Adjudicating Authority would also have to adequately explain as to why the exclusion covered under Chapter Note 5(c) to Chapter 12, and which is an Exclusionary Clause, would not apply to the said SEAWEED EXTRACT imported by the Petitioner."

"At least until a fresh adjudication order is passed, the same shall be provisionally released within a period of two weeks of furnishing of a bond executed by the Petitioner... The Customs Department shall not insist on the Petitioner furnishing any security, either by way of Bank Guarantee or otherwise, other than furnishing the aforesaid bond."

Core principles established include the mandatory compliance with natural justice by furnishing all documents relied upon, the necessity of reasoned orders especially when deviating from prior binding decisions, and the importance of considering all relevant evidence including test reports in classification disputes. The Court emphasized the need for administrative authorities to provide clear and adequate reasons when interpreting tariff classifications and applying exclusionary clauses.