2024 (11) TMI 1150 - HC - Customs

Classification of handcrafted articles of stone popularly known as Chakla Belan (Rolling Board and Rolling Pin), mortar and pestle and other allied articles - petitioners were classifying the exported article specifically under ITC(HS) 68159990 and which constituted the residual clause and read as others . By virtue of the inclusion of articles falling within the ambit of ITC(HS) 68159990, those products became entitled to claim MEIS rewards @ 5%. The aforenoted Public Notice No. 02/2015 was thereafter amended from time to time including by way of Public Notice No. 44/2015-2020 dated 05 December 2017 in terms of which the MEIS reward was increased from 5% to 7%. Scope of the assessment power that stands conferred upon the competent authorities under the FTDR Act and the Customs Act - HELD THAT - A process of self-assessment was ordained to form part of an assessment as contemplated under the Customs Act. This change had essentially come to be introduced in 2011 and pursuant to which self-assessment was acknowledged to be one of the modes of assessment as contemplated under the Customs Act. The procedure for assessment of duty is prescribed in Section 17 of that enactment. Prior to the amendments which came to be introduced in Section 17 by virtue of Finance Act, 2018, the Proviso to Section 17(2) while identifying the criteria relevant for selection of cases for purposes of verification, had recognised that power being guided by factors such as the valuation of goods, classification, exemption or concessional duties availed in terms of a notification issued under that Act. The Proviso had at the relevant time and prior to the passing of Finance Act, 2018 included the following phraseology regarding valuation of goods, classification, exemption or concessions of duty availed consequent to any notification issued therefore under this Act . Section 17 also included a sub-section (6) in terms of which a proper officer was empowered to undertake an audit in respect of duty in case it had failed to undertake a reassessment or pass a speaking order in respect thereof. The aforesaid sub-section (6) as it existed in Section 17 came to be omitted by Finance Act, 2018. The observations appearing in ITC Limited 2019 (9) TMI 802 - SUPREME COURT (LB) and BT India 2023 (11) TMI 478 - DELHI HIGH COURT assume significance when viewed in light of the various Bills of Entry as submitted by the writ petitioners on a self-assessment basis having been duly accepted and no questions in respect thereof having been raised. The Bills of Entry would thus be liable to be viewed as having been duly assessed and accepted. Undisputedly, it is decades after those exports had been affected and assessments completed that the respondents now seek to reopen those transactions and seek to question the benefits claimed by the writ petitioners. Undisputedly, consequent to the self-assessed Bills of Entry having been accepted and thus liable to be viewed as assessed, the stage of enquiry contemplated in terms of Section 17 of the Customs Act has clearly passed. That then leaves us to identify and determine the avenues which would otherwise be available to the customs authorities to reopen or review an assessment duly made. Recovery of duty u/s 28 and 28AA - The provisions of Section 28AAA are attracted where it is found that an instrument issued to a person under the FTDR Act was obtained by means of collusion, wilful misstatement or suppression of facts. While Section 28AAA does undoubtedly statutorily empower the respondents to recover duty benefits illegitimately claimed by virtue of an instrument, the larger question which merits consideration is of identifying the authority which could be recognized in law to undertake a determination with respect to whether an instrument could be said to have been obtained by way of collusion, wilful misstatement or suppression of facts. While we propose to return to this principal question a little later and in the subsequent parts of this decision, suffice it to note that Section 28AAA is a provision which stands at the crossroads of the Customs Act and the FTDR Act. It constitutes, in that sense, a junction or an intersection where the two statutes meet. Section 28AAA deals with situations of convergence and where a demand of duty is predicated upon a doubt being raised with respect to an instrument issued under the FTDR Act. Of critical significance, therefore, would be the issue of which authority should be recognised to have the jurisdiction to undertake the adjudication contemplated under that provision. An adjudication is warranted for the purposes of invoking Section 28AAA cannot possibly be doubted. The usage of the expression proper officer , and which is defined in Section 2(34) of the Customs Act to mean an officer of customs, also cannot be accorded undue significance when one bears in mind Section 28AAA (1) speaking of an instrument issued to a person for the purposes of this Act or the FTDR Act. The former undoubtedly is a reference to the Customs Act. Thus, Section 28AAA is clearly intended to encompass all contingencies arising out of or relating to an instrument issued for the purposes of the Customs Act or the FTDR Act as the case may be. Scope of the audit power which came to be independently incorporated in the Customs Act - As we read Audit Regulation 5, it becomes apparent that it is only after the disposal of any such objections that may have been invited that a final report containing the audit findings would come to be drawn. What however needs to be borne in mind is that the family of provisions pertaining to audit do not, at least in explicit terms, include a power to review, suspend or cancel an instrument issued either under the Customs or the FTDR Act. While hypothetically speaking an audit could contain findings or observations doubting a benefit or exemption claimed, we find ourselves unable to construe those provisions as enabling the customs authorities to suspend or cancel an instrument itself, be it under the Customs or the FTDR Act. Powers of DGFT - The Director-General or the licensing authority may by an order in writing suspend the operation of any 62 licence, certificate, scrip or any instrument bestowing financial or fiscal benefits granted under these rules, where proceedings for cancellation of such licence, certificate, scrip or any instrument bestowing financial or fiscal benefits has been initiated under rule 10. FDTR Rules thus confer a power on the DGFT or the licensing authority to regulate the grant, renewal, suspension and cancellation of licenses, certificates, scrips or any other instrument bestowing financial or fiscal benefits . The MEIS certificate would undoubtedly be an instrument which bestows a fiscal benefit. What we seek to emphasize and highlight is Rules 7, 9 and 10, embody in clear and unequivocal terms, a conferral of jurisdiction and power to commence an adjudicatory process that the DGFT could undertake while evaluating whether a license, certificate, scrip or instrument was liable to be suspended or cancelled. Validity of Audit objection letter - As the audit objection letter teems with definitive and predetermined conclusions and would not sustain when tested on the principles enunciated by the Supreme Court in Oryx Fisheries. We then find ourselves unable to sustain the audit objection letter even when tested on the anvil of the Audit Regulations which may be said to have been applied or invoked. As is evident from a reading of Regulation 5, the proper officer, after having apprised the exporter or the importer, as the case may be, of its intent to initiate an audit, is obliged to apprise the auditee of the objections before preparing the audit report. In case the auditee disagrees with the findings that appear in that report, a demand could be validly raised or created. Undisputedly, no such procedure appears to have been followed by the respondents in the facts of the present case. In fact, and contrary to the mandate of Regulation 5, the Assistant Commissioner has required the petitioners to pay sums representing amounts which according to that authority had been wrongly claimed under the MEIS and having clearly failed to abide by the statutory procedure prescribed. Purview of Sections 28(4) and 28AAA of the Act to sustain the direction for deposit as framed - Section 28(4) of the Act, as noted above, could have been invoked only if the Assistant Commissioner had come to the conclusion that the goods had escaped duty by reason of collusion, wilful misstatement or suppression of facts. It is only in those contingencies that Section 28(4) could have enabled the proper officer to reopen an assessment. However, all that is alleged in this respect is that the petitioners had failed to make a correct and truthful declaration and thereby mis-classified the goods with the avowed objective of claiming benefits under the MEIS. Unable to appreciate how the petitioners could have been charged of having failed to make a correct and truthful declaration when the imports were affected under the cover of MEIS certificates granted by the DGFT and which had never been questioned. In fact, the DGFT has not even and till date initiated any action against the writ petitioners alleging that the MEIS Certificate had been wrongly obtained. This too leads us to conclude that the impugned action is rendered wholly illegal, arbitrary and unsustainable. We then proceed to consider whether the action of the respondents would sustain under Section 28AAA - Section 28AAA is principally concerned with the right vested in the respondents to initiate action for recovery of duty and interest where an instrument issued to a person is found to have been obtained by means of collusion, wilful misstatement, or suppression of facts. The word instrument is defined by Explanation 1 to Section 28AAA to include any scrip, authorization, license, certificate, or any other document by whatever name called issued under the FTDR Act. We have already held that the MEIS certificate would clearly fall within the ambit of that expression in the preceding parts of this decision. Custom and DGFT Crossroad - It would be impermissible for the customs authorities to either doubt the validity of an instrument issued under the FTDR Act or go behind benefits availed pursuant thereto absent any adjudication having been undertaken by the DGFT. An action for recovery of benefits claimed and availed would have to necessarily be preceded by the competent authority under the FTDR Act having found that the certificate or scrip had been illegally obtained. We have already held that the reference to a proper officer in Section 28AAA is for the limited purpose of ensuring that a certificate wrongly obtained under the Customs Act could also be evaluated on parameters specified in that provision. However, the said stipulation cannot be construed as conferring authority on the proper officer to question the validity of a certificate or scrip referable to the FTDR Act. Invocation of Section 28AAA on a more fundamental ground - The controversy with respect to classification appears to have been raised for the first time in December of 2018 when the respondent no. 6 raised a doubt as to whether the stone and marble handicraft articles were liable to be placed under ITC(HS) 68159990. As was noted hereinabove, the sine qua non for Section 28AAA getting attracted is the triumvirate of collusion, suppression and wilful misstatement which are spoken of in sub-section (1) being attracted. Even if it were assumed for the sake of argument that the writ petitioners had wrongly classified or placed articles in question under ITC(HS) 68159990, the same would clearly not amount to it being ipso facto assumed that the same amounted to an act of suppression or wilful misstatement. Rendering of a finding in favour of the respondents on the issue of collusion would have far greater ramifications. A finding on that score, if returned against the writ petitioners, would essentially require us to hold that the MEIS certificates had been obtained by the writ petitioners in collusion with the officers working under the DGFT. That too is not the allegation which is levelled by the respondents against the writ petitioners. The controversy, therefore, as to whether the subject articles were liable to be classified under CTH 6802 or 6815, would clearly not qualify the tests constructed by Section 28AAA. Classification - handicraft articles being liable to be classified as falling under HSN 6815 or not? - The issue of classification was indelibly connected with the right of the writ petitioners to avail benefits under the MEIS. The MEIS scrip was issued by the office of the DGFT. The issuance of the MEIS scrip was dependent upon the exported article falling in the detailed list of products which came to be published by the DGFT on 01 April 2015. Table 2 set out the code wise list of products, as well as corresponding reward rates under the MEIS Scheme. There was undisputedly a reference to CTH 6815 as well as ITC(HS) 68159990 in that table. Once the DGFT had proceeded to issue the MEIS scrip to the writ petitioners, they would have been justified in assuming that the issue of classification was neither questioned nor doubted. It is on the aforesaid basis that exports were affected between the period 1991 to 2018. In the absence of the DGFT having ruled upon the issue of classification or having expressed any doubt with respect to the eligibility of the writ petitioners to claim benefits under the MEIS, it would be wholly impermissible for the respondents to take punitive action against the writ petitioners. The subject of classification stands explicitly reserved for the consideration of the DGFT in terms of Para 2.57 of the FTP. This too convinces us to conclude that the action as initiated by the respondents is rendered arbitrary. Determination - As we allow the present writ petitions hereby quash the audit objection letters and summons issued - direct the respondents to refund the amounts collected from the writ petitioners Since we have desisted from rendering any final opinion on the aspect of classification, the present decision shall be without prejudice to the right of the DGFT to initiate proceedings pertaining to the validity of the MEIS certificates issued to the writ petitioners if so chosen and advised and if otherwise permissible in law.

Summary

Issues Involved:

1. Classification of exported goods under the correct Harmonized System of Nomenclature (HSN) Code.
2. Legitimacy of benefits claimed under the Merchandise Exports from India Scheme (MEIS).
3. Authority of customs officers to reassess self-assessed export goods.
4. Applicability and invocation of Sections 28 and 28AAA of the Customs Act for recovery of duties.
5. The interplay between the Customs Act and the Foreign Trade (Development and Regulation) Act (FTDR Act).
6. Validity of audit objection letters and summons issued by customs authorities.

Detailed Analysis:

1. Classification of Exported Goods:

The core issue revolves around the classification of stone and marble handicraft articles exported by the petitioners. The petitioners classified these under ITC(HS) 68159990, claiming benefits under the MEIS. The respondents, however, contended that the correct classification should be under CTH 6802, which does not entitle exporters to MEIS benefits. The court noted that CTH 6802 pertains to "worked monumental or building stone" while CTH 6815 is a residual entry for articles of stone not specified elsewhere. The court observed that the classification issue had not been definitively settled by the CBIC or the DGFT, and the petitioners had consistently classified their goods under ITC(HS) 68159990 since 1991 without objection.

2. Legitimacy of MEIS Benefits:

The court examined whether the petitioners were entitled to MEIS benefits, which depend on the correct classification of goods. The DGFT had issued MEIS scrips to the petitioners, which were not questioned by the customs authorities at the time of issuance. The court emphasized that the DGFT is the competent authority to interpret the Foreign Trade Policy (FTP) and determine the classification of goods for export benefits. The court found no evidence of collusion, wilful misstatement, or suppression of facts by the petitioners in obtaining the MEIS scrips.

3. Authority of Customs Officers:

The court analyzed the scope of customs officers' authority under the Customs Act, particularly Section 17, which allows for self-assessment by importers and exporters. The court noted that once a self-assessed bill of entry is accepted, it attains finality unless reopened under statutory provisions. The customs authorities failed to initiate reassessment within the stipulated time and did not follow the prescribed procedure for questioning the classification.

4. Applicability and Invocation of Sections 28 and 28AAA:

Section 28 of the Customs Act pertains to recovery of duties not levied or paid due to reasons other than collusion or suppression. The court found that the respondents did not allege collusion or suppression explicitly, which is necessary to invoke Section 28(4). Section 28AAA deals with recovery when an instrument is obtained by collusion or misstatement. The court held that any action under Section 28AAA must be preceded by a determination by the DGFT regarding the invalidity of the MEIS scrips, which was absent in this case.

5. Interplay Between Customs Act and FTDR Act:

The court highlighted that the FTDR Act and the FTP confer exclusive authority on the DGFT to interpret policy and classify goods for export benefits. The customs authorities cannot independently question the validity of an instrument issued under the FTDR Act without a prior determination by the DGFT. The court emphasized the need for a harmonious interpretation of the two statutes, ensuring that the DGFT's role is not usurped by customs authorities.

6. Validity of Audit Objection Letters and Summons:

The court found the audit objection letters to be predetermined conclusions rather than tentative findings, depriving the petitioners of a fair opportunity to contest the classification. The court also noted procedural lapses in the issuance of audit objections and summons, which were not in compliance with the statutory requirements. The court quashed the audit objection letters and summons, directing the refund of amounts collected from the petitioners.

Conclusion:

The court allowed the writ petitions, quashing the impugned audit objection letters and summons. It directed the respondents to refund the amounts collected from the petitioners. The decision was without prejudice to the DGFT's right to initiate proceedings regarding the validity of the MEIS certificates if deemed necessary and permissible by law.