2019 (1) TMI 1514 - HC - Customs

100% EOU - Exemption under N/N. 13/81 Custom dated 9.2.1981 - raw materials, including those rendered as wastage during manufacture of exported goods - imported raw materials contained in wastage in excess of input-output norms - demand of duty with penalty on wastage of imported fabrics - Whether based on the standard input output norms (SION) fixed under the Exim Policy, the appellant can be called upon to pay customs duty in respect of the excess fabric consumed by it? Held that - The Duty Exemption Scheme is contained in Chapter VII of the Import Export Policy and Procedures, 1992-1997. Paragraph 113 thereof relates to Special Schemes. Sub-clause (ii) thereof, which is relevant for the present purpose, provides that for readymade garments (other than the leather garments) the special scheme for value based licence provides for the import of fabrics and trimming/embellishments with Actual User condition. The details of the scheme are given in the Handbook of Procedure, 1992-97 (Vol.II) - Vide Notification No.13-Cus dated 9.2.1981, the Central Government, in exercise of powers under section 25 of the Customs Act, has exempted goods specified in the table therein below when imported into India for the purpose of manufacture of articles for export out of India by 100% export oriented undertakings approved by the Board of Approval for 100% Export Oriented Undertakings from the whole of the duty of customs leviable thereon under the First Schedule to the Customs Tariff Act, 1975 and the additional duty, if any, leviable thereon under section 3 of that Act, subject to the conditions stipulated thereunder. In this case, there is no dispute that the duty free imported goods were used in the manufacture of final products for export and the waste was generated during the course of the manufacturing process. The export obligation against the goods imported as per the letter of intent has been fulfilled - It is also not in dispute that the waste was disposed of after due permission being obtained from the Deputy Commissioner, Central Excise - The department has nowhere alleged that the duty free imported goods were not consumed in the manufacturing of the finished goods or that such goods have been cleared in the guise of removal of waste. There is no allegation relating to removal of goods with intent to evade payment of duties - In the opinion of this court, once it is not disputed that the goods were used in the manufacturing of finished goods and the export obligation has been duly fulfilled, the benefit of exemption provided under the notification in question cannot be denied to the appellant. N/N. 13-Cus dated 9.2.1981 - Held that - Notification No.13-Cus is primarily concerned with fulfillment of export obligation from the goods imported into India and the satisfaction required to be recorded by the Assistant Collector as contemplated by Condition (6) is not in the context of wastage generated, but in the context of manufacture of articles for export from the imported goods. Therefore, such satisfaction would be relatable to actual use of the goods for the purpose of manufacture to ensure that there is no diversion of goods or that imported raw material is not clandestinely removed - In the present case, as noticed earlier, it is not the case of the respondent that any part of the imported fabric has been diverted or clandestinely removed. The only allegation is that the waste generated is more than the standard input output norm, which has nothing to do with the fulfillment of export obligation or compliance with the conditions of the exemption notification. Under the circumstances, the raw material being exempted under N/N. 13/81-Customs dated 09.02.1981, the demand of customs duty on imported raw materials contained in wastage in excess of input-output norms is not justified. Despite the fact that excess consumption has been found as compared to the standard input output norms, such excess waste has been permitted to be destroyed by the Deputy Commissioner, Central Excise & Customs, and hence, the respondent is not justified in demanding customs duty forgone on the excess waste material worked out on the basis of the input-output norms - This court is of the view that the mere fact that the wastage is in excess of the input output norms, without anything more, would not be sufficient for the Assistant Collector to arrive at the satisfaction that the imported fabric has not been used for the manufacture of the articles for export. Condition No.6 of the Notification No.13-Customs dated 9.2.1981, cannot be read in a manner whereby despite the fact that the assessee is in a position to show that the entire material has been used for the purpose of manufacture of goods and there is no allegation with regard to diversion of goods, merely because the wastage norms are not satisfied, the Assistant Collector of Customs can record satisfaction to the effect that the goods have not been used for the manufacture of articles for export. The Appellate Tribunal was, therefore, not justified in confirming the customs duty on imported raw materials contained in wastage in excess of input output norms under the Export Import policy - appeal allowed - decided in favor of appellant.

Summary

Issues Involved:
1. Exemption of raw materials, including wastage, under Notification No.13/81-Custom dated 9.2.1981.
2. Legality of demand for Customs duty on imported raw materials contained in wastage exceeding input-output norms under the Export Import Policy.
3. Legality and sustainability of the Appellate Tribunal's order confirming duty demand with penalty on wastage of imported fabrics.

Issue-wise Detailed Analysis:

1. Exemption of Raw Materials Including Wastage:
The appellant, a 100% Export Oriented Undertaking (EOU), imported fabrics duty-free under Notification No.13/81-Cus for manufacturing trousers. The fabrics were duly recorded and used in manufacturing, fulfilling export obligations. The appellant argued that neither the Exim Policy nor the Notification mandated recovery of duties on inputs even if consumption exceeded prescribed norms, asserting that the norms were guidelines, not fixed formulas. It was contended that all conditions of the notification were met, and no diversion or clandestine removal of fabrics occurred. The court noted that the notification did not specify criteria for waste or conditions regarding wastage extent, emphasizing that the primary concern was the fulfillment of export obligations from imported goods.

2. Legality of Demand for Customs Duty on Excess Wastage:
The Commissioner of Central Excise and Customs issued a show cause notice based on excess consumption of fabrics beyond the input-output norm of 1.687 square meters per trouser, demanding duties of ?17,44,818.23. The appellant maintained that higher waste generation did not justify duty demands unless explicitly provided by law. The court observed that the Exim Policy's paragraph 190 allowed for disposal of waste as per norms, but this was distinct from fulfilling export obligations under the exemption notification. The court concluded that the mere excess of wastage norms did not justify duty demands, as the waste was generated during manufacturing, and the export obligations were met.

3. Legality and Sustainability of Appellate Tribunal's Order:
The Appellate Tribunal upheld the duty demand with interest but reduced the penalty. The appellant challenged this, arguing that the tribunal failed to consider that the excess waste was permitted for destruction by the Deputy Commissioner, Central Excise, and that the Development Commissioner had fixed ad-hoc wastage norms at 15%. The court found that the tribunal erred in confirming the duty demand, as the notification did not stipulate conditions for wastage extent, and the satisfaction required by the Assistant Collector pertained to the actual use of goods for manufacturing export articles, not wastage norms. The court held that the tribunal was not justified in confirming the duty on excess wastage and set aside the impugned order, duty demand, and penalty.

Conclusion:
The appeal was allowed, quashing the Appellate Tribunal's order and setting aside the duty demand and penalty. The court answered the questions in favor of the appellant, emphasizing that the exemption under Notification No.13/81-Cus applied to the raw materials, including wastage, as long as export obligations were fulfilled, and no diversion or clandestine removal occurred.