2025 (6) TMI 1442 - AT - Customs

Levy of penalty u/s 112(a) and 114(iii) of the Customs Act 1962 - jurisdiction of Customs Authorities to re-open or question the export performance of the Appellants against three Advance Licenses after they have fulfilled the Export Obligation and obtained the Export Obligation Discharge Certificate (EODC) from the JDGFT - fulfilment of export obligation in respect of 10 advance licenses valid for 18 months issued under Customs N/N. 51/2000-Cus. dated 27.04.2000 and N/N. 43/2002-Cus dated 19.04.2002 or not - HELD THAT - It is found that the export obligations are to be fulfilled in terms of the value addition as specified at para 7.13 of the Foreign Trade Policy during the relevant period. The claim of the appellant is that they have overall met the export obligation as per the details provided to the DGFT and the investigations by the customs was premature seems to be justified inasmuch as the export obligation is to be discharged within the period specified in the said certificate or within such extended period as may be granted by the Licensing Authority by exporting resultant products manufactured in India which are specified in Part E of the said certificate. The question of looking into the actual consumption of fabric in square meters does not arise unless there is an evidence to prove that the imported materials have not been utilized in the export product or diverted in the open market - there are no evidences placed on record except to state that in certain quantity of exports claimed towards discharge of export obligation have actually being cleared under drawback which is clearly inadmissible. This fact of availing drawback wrongly has been admitted and to that extent the appellant has accepted to reverse the ineligible drawback claimed by them. Since DGFT Delhi has accepted their request for revalidation/extension in export obligation against the disputed advance licenses and has directed the appellant to approach the Regional Authority for clubbing of the same it is found that any demand of duty will be pre-mature. The appellant had also placed on record Public Notice No. 34/2015-2020 dated 24.10.2017 issued by Department of Commerce wherein it had allowed facility of clubbing of advance licenses as one-time relaxation and for regularization of exports. Accordingly in the interest of justice the matter needs to be remanded to the Commissioner to verify with the DGFT with regard to the clubbing of the exports in respect of the other licenses and whether any EODC has been issued by DGFT and only to the extent of export obligation not fulfilled the question of liability arises. It is also on record that the appellant had simultaneously claimed drawback on some of the quantity which admittedly amounts to Rs.15, 68, 943/- as claimed by the appellant and to this extent the appellant is liable to reverse the drawback. These facts having not been verified the same also stands remanded. Conclusion - i) The appellant having fulfilled export obligations as per DGFT records the demand of duty on 3 licenses where EODC was issued stands set aside except for reversal of wrongly claimed drawback. ii) The matter is remanded to the Commissioner for verification with DGFT regarding clubbing and issuance of EODC for the remaining licenses and for quantification of duty and drawback reversal if any. Appeal disposed off by way of remand.

Summary

The core legal questions considered by the Tribunal in this appeal are:

1. Whether the Customs Authorities have jurisdiction to re-open or question the fulfillment of export obligations by the appellant in respect of Advance Licenses after Export Obligation Discharge Certificates (EODCs) have been issued by the Directorate General of Foreign Trade (DGFT).

2. Whether the demand of customs duty on the differential quantity of imported fabric not consumed in manufacture of export goods is sustainable, particularly when resultant garments have been exported.

3. Whether the appellant is liable to pay customs duty and penalties for alleged diversion or misuse of imported duty-free fabrics under Advance Licenses.

4. The applicability and interpretation of the relevant Customs Notifications, Foreign Trade Policy (FTP) provisions, and Standard Input Output Norms (SION) in determining fulfillment of export obligations.

5. The extent and validity of penalty imposition under the Customs Act, 1962, in view of the appellant's claim of fulfillment of export obligations and pending clubbing requests before the DGFT.

Issue-wise Detailed Analysis:

Issue 1: Jurisdiction of Customs Authorities to Re-open Export Obligation Fulfillment after EODC Issuance

Legal Framework and Precedents: The Customs Notification No. 51/2000-Cus dated 27.04.2000 exempts materials imported under Advance Licenses from customs duty subject to fulfillment of export obligations and conditions including production of EODC issued by DGFT. The Foreign Trade Policy (FTP) 1997-2002 and 2002-2007, along with the Handbook of Procedures (HBP), govern export obligations and their discharge. The appellant relied on judicial precedents holding that once export obligation is discharged and EODC issued by DGFT, Customs Authorities lack jurisdiction to re-open or question such fulfillment.

Court's Interpretation and Reasoning: The Tribunal recognized that the export obligation discharge is primarily under the jurisdiction of DGFT. The issuance of EODC by DGFT signifies acceptance of fulfillment of export obligation. The Tribunal noted that Customs Authorities' demand based on alleged shortfall in consumption of imported fabric is premature and not sustainable in the absence of evidence that imported materials were diverted or not used for export production.

Key Evidence and Findings: The appellant produced EODCs for three Advance Licenses (Nos. 0710007077, 0710007206, 0710016027), which were accepted by DGFT. The appellant also submitted detailed data showing export quantities and FOB values exceeding or matching export obligations fixed by DGFT. The appellant's request for clubbing of multiple licenses to regularize export performance was pending with DGFT.

Application of Law to Facts: The Tribunal held that since DGFT had accepted export fulfillment and issued EODCs, Customs Authorities cannot question the export performance except to the extent of verifying misuse or diversion of imported goods. The absence of evidence of diversion or misuse rendered the Customs demand unsustainable.

Treatment of Competing Arguments: The Revenue argued that Customs has jurisdiction to verify actual consumption and enforce customs duty where export obligations are not met. The Tribunal distinguished this by emphasizing the role of DGFT in export obligation discharge and the binding effect of EODCs, thus limiting Customs' role.

Conclusion: Customs Authorities lack jurisdiction to re-open export obligation fulfillment after EODC issuance by DGFT, except where diversion or misuse is proved.

Issue 2: Demand of Customs Duty on Differential Quantity of Imported Fabric Not Consumed in Manufacture of Export Goods

Legal Framework and Precedents: Customs Act, 1962 provisions including Section 28(1), Section 28AB, and relevant Customs Notifications govern duty exemption under Advance Licenses. The FTP and SION norms prescribe allowable fabric consumption per garment, including normal allowance for wastage (Para 4.1.1 of Exim Policy). The Hon'ble Supreme Court in Titan Medical Systems Pvt. Ltd. vs. Collector of Customs clarified that estimates for input requirements may include allowances and variances.

Court's Interpretation and Reasoning: The Tribunal observed that the appellant's average fabric consumption per garment (1.97 sq. mtrs.) was below the SION prescribed norms (2.20 to 2.75 sq. mtrs.) which already factor in normal wastage, rejection, and other contingencies. The Tribunal held that the investigating agency and Commissioner erred in ignoring the permissible wastage and the fact that export of resultant garments had been made.

Key Evidence and Findings: The appellant's data showed total fabric imported and garments exported with value addition exceeding obligations. The appellant also demonstrated that the SION norms were estimates and subject to adjustments based on buyer specifications, wastage, and manufacturing processes.

Application of Law to Facts: The Tribunal applied the principle that export obligation is to be fulfilled in terms of value addition and resultant product export, not merely physical consumption of inputs. Since export obligations were met and garments exported, demand on differential fabric quantity was unjustified.

Treatment of Competing Arguments: Revenue contended that differential quantity not consumed should attract duty and penalties. The Tribunal rejected this, emphasizing the FTP provisions allowing normal wastage and the absence of evidence of diversion.

Conclusion: Demand of customs duty on differential fabric quantity not consumed is not sustainable where export obligations are fulfilled and resultant garments exported, considering allowance for wastage under SION and FTP.

Issue 3: Liability for Customs Duty, Confiscation, and Penalties for Alleged Diversion or Misuse

Legal Framework and Precedents: Sections 110(o), 111(o), 113(i) and (ii), 112(a), and 114A of the Customs Act, 1962 provide for confiscation and penalty for diversion or misuse of duty-free imported goods under Advance Licenses. The appellant relied on the decision in Commissioner of Customs, Hyderabad vs. Cheminor Drugs Ltd. that no duty is payable unless diversion or misuse is proved.

Court's Interpretation and Reasoning: The Tribunal found no conclusive evidence on record proving diversion or misuse of imported fabrics or garments exported under drawback. The admitted drawback claim on some garments was accepted for reversal. The Tribunal held that penalty and confiscation demands were premature and unjustified in absence of proof of misappropriation.

Key Evidence and Findings: The appellant admitted to reversing drawback wrongly claimed on certain garments. The DGFT had accepted the clubbing request and extension of export obligations, indicating bona fide intent and compliance. No evidence was found that imported fabrics were diverted to unauthorized use or sale.

Application of Law to Facts: Since diversion or misuse was not established, confiscation and penalty under Customs Act provisions could not be sustained. The pending clubbing request before DGFT further complicated determination of liability.

Treatment of Competing Arguments: Revenue urged strict enforcement of duty demands and penalties. The Tribunal emphasized the need for concrete evidence of diversion and the principle of fair opportunity for regularization under FTP and HBP.

Conclusion: Without proof of diversion or misuse, confiscation and penalty demands cannot be upheld. Penalties were set aside pending DGFT's decision on clubbing and export obligation regularization.

Issue 4: Interpretation of Customs Notifications, FTP, and SION in Export Obligation Fulfillment

Legal Framework: Customs Notification No. 51/2000-Cus exempts duty on materials imported under Advance Licenses subject to conditions including export obligation discharge by exporting resultant products specified in Part 'E' of the license. FTP 1997-2002 and 2002-2007 and HBP outline the procedure for issuance, fulfillment, and regularization of Advance Licenses, including provisions for value addition, normal wastage, and clubbing of licenses.

Court's Interpretation and Reasoning: The Tribunal emphasized that export obligation fulfillment is to be measured in terms of value addition (FOB value of exports relative to CIF value of inputs) rather than strict physical consumption of inputs. The allowance for normal wastage and rejection is recognized under FTP. The Tribunal also highlighted the facility of clubbing multiple licenses to regularize export obligations and the role of DGFT in granting extensions and revalidation.

Key Evidence and Findings: The appellant's data showed export quantities and FOB values exceeding obligations fixed by DGFT. The appellant's request for clubbing was accepted by DGFT's Policy Relaxation Committee, though pending final approval. The appellant complied with procedural requirements and submitted EODCs for certain licenses.

Application of Law to Facts: The Tribunal applied the legal framework to hold that export obligations were substantially fulfilled, taking into account value addition, normal wastage, and pending clubbing requests. The Customs demand based on physical input-output mismatch was thus misplaced.

Treatment of Competing Arguments: Revenue's reliance on physical consumption and alleged shortfalls was countered by appellant's reliance on value-based fulfillment and procedural compliance under FTP and Customs Notifications.

Conclusion: Export obligation fulfillment must be assessed holistically under FTP and Customs Notifications, considering value addition, wastage, and procedural regularization mechanisms.

Issue 5: Penalty Imposition under Customs Act in Light of Pending Clubbing and Export Obligation Regularization

Legal Framework: Sections 112(a) and 114(iii) of the Customs Act provide for penalties for contravention of customs laws. However, bona fide defaults and pending regularization requests may mitigate penalty liability.

Court's Interpretation and Reasoning: The Tribunal noted that since the appellant's claim for clubbing and revalidation of export obligations was pending with DGFT and accepted in principle, the question of penalty was premature. The Tribunal set aside penalties on all appellants in view of the undetermined liability and ongoing regularization process.

Key Evidence and Findings: The appellant's correspondence with DGFT and acceptance by Policy Relaxation Committee evidenced bona fide efforts to comply. No conclusive findings of intentional evasion or malafide conduct were recorded.

Application of Law to Facts: Considering the pending DGFT decision and bona fide nature of appellant's actions, penalties were not justified at this stage.

Treatment of Competing Arguments: Revenue's demand for penalty was balanced against appellant's procedural compliance and pending clubbing request.

Conclusion: Penalties under Customs Act were set aside pending final determination of export obligation fulfillment by DGFT.

Significant Holdings:

"Since the DGFT had accepted export fulfillment and issued Export Obligation Discharge Certificates, the Customs Authorities have no jurisdiction to question the export performance except to the extent of verifying misuse or diversion of imported materials."

"Export obligation fulfillment is to be assessed in terms of value addition and resultant product export, not merely on physical consumption of inputs, considering normal allowance for wastage under the Standard Input Output Norms."

"In absence of evidence of diversion or misuse of imported duty-free fabrics, confiscation and penalty demands under the Customs Act cannot be sustained."

"Pending clubbing and regularization requests before DGFT, demands of customs duty and penalties are premature and liable to be remanded for verification and final decision by DGFT."

"The appellant having fulfilled export obligations as per DGFT records, the demand of duty on 3 licenses where EODC was issued stands set aside, except for reversal of wrongly claimed drawback."

"The matter is remanded to the Commissioner for verification with DGFT regarding clubbing and issuance of EODC for the remaining licenses, and for quantification of duty and drawback reversal, if any."