2023 (10) TMI 452 - HC - Customs

Reversal of Duty Drawback - Advance Licence and duty drawback are mutually exclusive or not - goods imported duty free under advance licence scheme can be utilized in the manufacture of goods exported under duty draw back (All Industry Rate) or not - Rule 3(1) of the Customs and Central Excise Duties Drawback Rules 1995 r/w General notes No.2(b) to the Notification No. 26/2003 Cus (NT) dated 01.04.2003. HELD THAT - Circular No.19/2005 dated 21.03.2005 concedes to the position that duty drawback is sought by manufactures who use exempted/duty free inputs. The rates in such cases are the AIR. To be noted that Clause 4.1.14 of FTP does not specifically talk of either Brand rate or AIR and thus, it is the submission of the assessee that it would apply only to those cases where brand rates apply. This is for the reason that it is only in such cases that a bifurcation of the individual components and consequent apportionment would at all, be possible - A perusal of the Circular makes it clear that AIR duty is to be allowed in full in cases where a portion of inputs would qualify to be non-duty paid. Thus, the absolute position under the 1995 Rules has stands modified somewhat by clause 4.1.14 of FTP and Circular No. 19/2005. The substantial questions of law are thus answered in favour of the assessee and adverse to the revenue - The Circular proceeds on the basis that the inputs that are duty exempt constitute only a fraction of the over-all inputs used, as otherwise, the very purpose of the DD Scheme would become redundant. Abuse of the position, as recognized even under Circular No.19/2005 is not an impossibility. In the present case, there is a finding of fact by the Tribunal to the effect that the indigo blue used in the goods claiming duty drawback, is only a fraction. This finding of fact has not been challenged as perverse in this appeal and has become final. Thus, our answer to the questions of law is premised on this factual finding - Appeal dismissed.

Summary

Issues Involved:
1. Utilization of duty-free imported raw materials under the Advance Licence Scheme (ALS) and Duty Drawback Scheme (DD Scheme).
2. Eligibility of duty drawback for goods manufactured using duty-free inputs.
3. Confiscation and penalty under the Customs Act, 1962.

Summary:

Utilization of Duty-Free Imported Raw Materials:
The assessee imported raw materials, including indigo blue, duty-free under the Advance Licence Scheme (ALS) and used them for manufacturing denim from 2000 to 2002. The ALS mandated that the benefit could only be availed if exports were completed within a stipulated timeframe, which the assessee complied with. Post-fulfillment of the export obligations, the surplus indigo blue was used in further manufacturing.

Eligibility of Duty Drawback:
The authorities issued a show cause notice questioning why the benefits obtained from the DD Scheme should not be reversed since the assessee availed benefits under both ALS and DD Scheme for the same raw materials. The Customs and Central Excise Duties Drawback Rules, 1995, under Rule 3, stipulate that no drawback shall be allowed if the raw materials have been imported duty-free. However, the Foreign Trade Policy (FTP) 2004-09 at Clause 4.1.14 allows drawback for duty-paid materials used in exported goods, even if some inputs were duty-free. Circular No. 19/2005-Cus clarified that the All Industry Rate (AIR) of duty drawback should be allowed even if some inputs were non-duty paid, based on an average industry rate.

Confiscation and Penalty:
The original authority proposed reversing the entire drawback claimed and levied a penalty under Section 114(iii) of the Customs Act, 1962. However, the Tribunal reversed this decision, noting that only a fractional quantity of indigo blue was used in the second round of manufacturing, and the AIR was applied, which considers a consolidated industry rate.

Court's Decision:
The High Court dismissed the appeal, affirming the Tribunal's decision. The court stated that the absolute position under the 1995 Rules is modified by Clause 4.1.14 of FTP and Circular No. 19/2005. The substantial questions of law were answered in favor of the assessee, emphasizing that the fractional use of duty-free inputs does not negate the eligibility for duty drawback under AIR. The finding of fact by the Tribunal that only a fraction of indigo blue was used was not challenged and thus became final.