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Garment Craft v. Commissioner Of Customs, Mumbai
Tribunal Order Summary (per Gowri Shankar, Member (T))
Factual and Procedural Background
M/s Garment Craft imported two consignments, each of 15,000 metres, of flocked velvet fabric. The importer claimed duty-free clearance under an Import Export Pass Book and a licence issued under the DEEC scheme (relying on Notification No. 117/88).
At the time the goods were imported, the importer had already completed its export obligation for "rayon ready-made garments." After enquiries, the Customs Department concluded that the imported flocked velvet could not be treated as replenishment material because it was not identical in nature and technical characteristics to the goods used in the manufacture of the exported garments. The Department also alleged under-declaration of value.
A notice was issued proposing denial of the benefit of Notification No. 117/88, confiscation of the goods and imposition of penalty for misdeclaration of value. After the importer was heard, the Collector increased the assessed value, denied the benefit of the notification, ordered confiscation of the goods (with an option to redeem) and imposed a penalty. The importer appealed to the Tribunal. The Department also appealed against the Collector's finding on the ground that the redemption fine and penalty were too low.
Legal Issues Presented
- Whether the imported flocked velvet fabrics were eligible for duty-free import as "replenishment" under Notification No. 117/88.
- Which party bears the burden of proof to show entitlement to the benefit of the notification — the importer (assessee) or the Department.
- Whether "replenishment" under Notification No. 117/88 requires that the imported goods be identical to and actually used in the manufacture of the exported product prior to importation.
- Whether the licensing authority's acceptance of the import licence conclusively determines entitlement to the notification benefit, or whether Customs must independently be satisfied under Section 25 of the Customs Act.
- Whether the Collector was justified in enhancing the transaction value of the imported goods by reference to contemporaneous invoices of other imports, and whether that supported confiscation and penalty for undervaluation.
- Whether the Collector's redemption fine and penalty should be enhanced as contended by the Department.
Arguments of the Parties
Appellant (Garment Craft) — Main contentions
- The imported flocked velvet fabrics had in fact been used as trimmings and embellishments in the rayon garments that were exported, so the import qualified as replenishment under the notification.
- The absence of export-product samples with the Department should not be held against the importer; it was the Department's responsibility to have taken samples.
- For replenishment-following-export, it is not necessary that the imported goods be actually used in the exported product; the term "replenishment" should mean import against goods already exported and therefore the import licence and Pass Book acceptance by the Collector should suffice to grant notification benefit.
- If any doubt exists, it should be resolved by the licensing authority (which issued/accepted the licence) rather than by Customs.
Respondent (Customs / Department) — Main contentions
- The imported goods were not identical in nature and technical characteristics to the goods used in the manufacture of the exported garments, and therefore could not be treated as replenishment under the notification.
- The value of the goods had been underdeclared; contemporaneous invoices indicated higher values and the Collector therefore increased the assessed value, imposed confiscation and penalty.
- On appeal, the Department argued that the redemption fine and penalty imposed by the Collector were disproportionately low and not commensurate with the value of the goods and the gravity of the alleged offence.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Mysore Metal Ind. v. CCE | Establishes that it is the assessee's burden to show entitlement to benefit under a notification (i.e., to prove that they fall within the scope of the notification). | The Tribunal relied on this ratio to reject the importer's contention that doubt should operate in its favour; the Court held the importer should have established use of the imported fabric in the exported consignments and that failure to produce evidence (e.g., correspondence with buyers) meant the benefit could not be allowed. |
| State of Haryana v. Dalmia Dadri Cement Ltd. (AIR 1988 SC 342) | Interpreted the phrase "for use" to mean "intended for use" (as applied by the Supreme Court in that case). | The Tribunal observed that Notification No. 117/88 does not employ the words "for use" and that the present notification expressly requires that the goods "shall be used" for the purpose specified; consequently, the Court held that the State of Haryana decision's construction of "for use" was not directly applicable to the wording of Notification No. 117/88. |
| Preet Chattons v. Collector of Customs, Goa (Tribunal) | Applied the State of Haryana interpretation ("intended for use") to other notifications (Notifications 224 and 225/85-C, as noted in the opinion). | The Tribunal noted that the application of that interpretation in Preet Chattons to different notifications does not aid the importer here because Notification No. 117/88 uses different, clearer wording requiring actual use. |
Court's Reasoning and Analysis
The Tribunal proceeded through the following analytical steps, applying statutory language, policy provisions and precedent as they appear in the record:
- Burden of Proof: The Tribunal invoked the principle (from Mysore Metal Ind. v. CCE) that the assessee must demonstrate entitlement to a notification's benefit. The Tribunal therefore rejected the importer's argument that the Department bore the burden to show non-use or that doubts should be resolved in the importer's favour.
- Sufficiency of Evidence of Use: The importer relied on purchase documents showing it had bought similar fabrics; the Tribunal found this insufficient to show those fabrics were actually used in the specific exported consignments. The Court noted that proof (for example, correspondence with buyers) could have demonstrated actual use, but such proof was not produced.
- Meaning of "Replenishment" under Notification No. 117/88: The Tribunal carried out a textual and contextual interpretation of the notification and relevant import policy provisions. It observed that the notification permits duty-free import "to be exported or in replenishment of goods used in the manufacture of the resultant product." The Tribunal read this to mean replenishment is allowed only to the extent of material actually used in manufacture of the exported product prior to the date of first importation under the Pass Book. The Court relied on the ordinary meaning of "replenish" and on policy paragraphs (Para 257(1); Para 261(1) and (2)) which require declaration that items sought are "actually required for the manufacture of the export product."
- Licensing Authority vs Customs Administration: The Tribunal rejected the importer's argument that the licensing authority's acceptance of the licence should conclusively determine entitlement. The Court emphasized that a notification issued under Section 25 of the Customs Act is administered by Customs, and it is for Customs to be satisfied that the imported goods conform to the notification. The fact that the import was against a valid licence did not preclude Customs from finding the goods were not replenishment because the exported goods did not contain the kind of fabric imported.
- Valuation and Undervaluation: The Collector had enhanced the value of the goods by reference to contemporaneous invoices describing "velvet fabrics P/B" at higher values. The Tribunal examined whether those contemporaneous invoices covered "identical" or "similar" goods within the meaning of the Valuation Rules and Section 14. The Tribunal found the invoices lacked technical details (denierage, yarn type, pile length, thickness, etc.) showing identity or similarity; the only common facts were that the consignments were velvet and from Korea. The Tribunal concluded that such superficial commonality was insufficient to impugn the transaction value and therefore the charge of undervaluation failed.
- Consequence for Confiscation and Penalty: Because confiscation and penalty had been imposed solely on the ground of misdeclaration of value (which the Tribunal found unsustainable), the Tribunal held those measures were not maintainable.
- Department's Appeal on Redemption Fine and Penalty: Given the finding that the underlying charge of undervaluation did not hold, the Tribunal also rejected the Department's appeal seeking enhancement of the redemption fine and penalty.
Holding and Implications
Core Ruling:
The Tribunal partly allowed the importer's appeal by setting aside the confiscation of the goods and the imposition of penalty; the Department's appeal for enhancement of redemption fine and penalty was dismissed.
Specific dispositional language used by the Tribunal:
- Appeal C/2129/92D: partially allowed to the extent that confiscation of the goods and imposition of penalty on Garment Craft are set aside.
- Appeal C/1038/93A (Department's appeal): dismissed.
Immediate consequences for the parties:
- Confiscation and penalties imposed on the importer by the Collector (which were based solely on an alleged undervaluation) are set aside.
- The Collector's enhancement of value and resulting confiscation/penalty are not sustained because the contemporaneous invoices did not establish identity or similarity of goods under the Valuation Rules or Section 14.
- The Department's request to increase the redemption fine and penalty failed.
No broader implications or new legal principle was announced beyond the application of existing interpretive rules: the Tribunal applied established principles on burden of proof and textual construction of the notification and relied on the import policy and valuation requirements to reach its decision. The opinion contains no statement that it establishes any new precedent beyond these applications.
[Order per : Gowri Shankar, Member (T)]. - M/s. Garment Craft imported two consignments, each consisting 15,000 metres of flocked velvet fabric and claimed clearance duty free under Pass Book and licence issued under the DEEC scheme. It was found that, when the goods were imported, the importer had already completed the obligation for export of “rayon ready-made garments”. After making enquiries, the department took the stand that the imported goods could not be used as replenishment material because they were not identical in nature and technical characteristics with goods used in the manufacture of the exported garments. The department was also of the view that the value of the goods had been underdeclared. Notice was issued proposing denial of the benefit of Notification No. 117/88 and confiscation of the goods and imposition of penalty on the ground of misdeclaration of value. After considering the cause shown, and hearing the importer, the Collector passed orders, increasing the value of the goods, denying the benefit of notification, ordering confiscation of the goods (with an option to redeem) and imposing a penalty. Hence the appeal by the importer.
2. The department has also come up in appeal against the Collector’s order on the ground that the redemption fine and penalty are disproportionately low and not commensurate with the value of the goods and the gravity of the offence.
3. We have heard both the sides.
4. It is first contended by the advocate for the importer (Garment Craft for short) that it had used flocked velvet fabrics (of the kind under consideration) as trimmings and embellishment in the rayon garments exported and therefore the import is legal and within the terms of the notification. He contends that the fact that no samples of the export product were drawn is the responsibility of the department and cannot therefore be used against the importer. He cites decisions in support of this contention.
5. The export was mainly through Delhi and the enquiries with the Customs at Delhi showed that no samples had been kept of the export product. We are unable to accept the contention that it was up to the department to show that the goods had not been used in the manufacture of the exported product, and that if there is doubt in this regard the benefit must go to the importer. The import of the goods is claimed free of duty in terms of notification. It is now well settled that it is upto the assessee to show that he is entitled to the benefit of the notification, and falls within its scope. This is the ratio of the Supreme Court judgement in Mysore Metal Ind. v. CCE - . If Garment Craft had in fact used the goods as trimming and embellishment in the garments exported, it would have been easy enough to establish it by means of correspondence with the buyer. This has not been done. The evidence relied upon consists of documents showing that it has purchased fabric of the kind imported. This by itself does not show that such fabrics was used in the consignments exported. It may have been used in other consignments either for local sale or for export. This contention therefore fails.
6. It is next contended that for the benefit of notification to be granted, it is not necessary that the imported goods should actually be used in the export product. It is argued that the term “replenishment” occurring in the notification is not to be construed as meaning replacement of goods used in the manufacture of the export product and that it only connotes import against goods already exported. It is contended that, if the term is interpreted as meaning in “replacement of goods” pertain to the export product, import licence would become redundant. Since the import is covered by the licence and has been so accepted by the Collector, it is necessarily follows that the benefit of the notification will be available. If there is any doubt in the matter, such doubt has to be resolved by the licensing authority, and not by the customs authority.
7. The notification allows import of duty free goods to be exported or in replenishment of goods used in the manufacture of the resultant product. There is no dispute that in this case, the export obligation having been complied with the goods were imported, the import is replenishment. There is no quarrel with the importer’s contention that the expression “goods when imported into India” occurring in the notification refers to the point of importation. It does not follow there from that, once the import is an order the benefit of the notification will automatically flow to the goods. It is one of the conditions of the notification that the imported goods should be covered by the Import Export Pass Book incorporating in the import licence, and another that the goods are specified in the licence. There are however only two of the conditions. The notification allows duty free import of goods as replenishment where the Pass Book holder has to export his finished goods to meet delivery schedule before he is able to import the raw material. This is condition (i) of the Notification. This condition also provides that replenishment shall be permitted only to the extent of material used in the manufacture of the resultant product exported prior to the date of first importation under the Pass Book. It is clear from this that the notification contemplates import as replenishment only in cases where the manufacturers of the final product has taken place prior to import and only to the extent of goods used in such manufacture. In other words, the import of goods as replenishment is allowed in order to replace to the manufacturer goods which he has acquired from elsewhere and used to make his export product. This is in accordance with the meaning of the term as replenishment as normally understood. The Concise Chambers Dictionary gives the meaning of “replenish” as “fill up again, to fill completely, to stock abundantly; to people”.
7A. The provisions of the import policy also confirms this view. Para 257 (1) of the relevant policy says that the Pass Book scheme provided the facility of duty free import required for the manufacture of the export product. Para 261(1) uses the same word. Sub-para (2) says that the application for the licence will have to declare that the items sought for import with values and quantities, mentioned are actually required for the manufacture of the export product (emphasis supplied). It is evident from this that what is permitted to be imported duty free is the goods which are actually required for manufacture of the finished product. This is to be contrasted with Para 283A, which provides for issue of blanket Import Export Pass Book for garments in which the list of items to be imported will be in generic terms and under Para 261 it is stated, will not apply.
8. It was contended that the term “for use” has been interpreted by the Supreme Court in State of Haryana v. Dalmia Dadri Cement Ltd. - AIR 1988 SC 342 to mean “intended for use”, and this has been applied by the Tribunal in Preet Chattons v. Collector of Customs, Goa - (Tribunal) to Notifications 224 and 225/85-C. Ex. Notification No 117/88 does not employ the words “for use”. It speaks of goods imported for the manufacture of product or replenishment of goods used. Condition (f) in fact specifically provides that the goods shall be used for the purpose specified in the notification. The fact that another notification may have required correspondence of goods by means of technical specifications etc, is of no help in considering the provisions of this notification. The meaning of the words in this notification is plain and clear and the words have to be taken as they read.
9. It is also not possible for us to agree that the decision as to whether the goods are for use or not in the finished product is that of the licensing authority. It is no doubt true that the import export scheme is a product of co-operation between the licensing authority and of the customs, and that for the scheme to succeed, the two organisations have to work together. However, a notification issued under Section 25 of the Customs Act is administered by the Customs authorities. It is they who have to be satisfied that the imported goods conform to the conditions of the notification. The Commission had found that the good had seen imported against a valid licence. We see no conflict between this, and the finding that since the exported goods did not contain the kind of fabric which has been under imported, the goods imported cannot be construed to be for replenishment. We decline to interfere with the conclusion that the benefit of the notification will not be available to these goods.
9A. The value of the goods has been enhanced on the ground that the invoices relating to contemporaneous import were at the higher value. The description in these invoices “velvet fabrics P/B” Velvet like any other fabric has various qualities depending upon the denierage or fineness of the yarn and the kind of yarn - synthetic, natural etc. — used in the warp and weft, thickness and length of pile etc. There is no indication that the goods imported by the Garment Craft corresponded in these particulars with the goods covered by the invoices relied upon by the Collector in terms of technical specifications, quality etc. They cannot therefore be considered to be “identical” or “similar” goods within the meaning of the Valuation Rules or to be “such or like goods” within the meaning of Section 14, even if we assume, (as contended by the Departmental Representative) that sub-section (1) of Section 14 would apply. The only thing common between these three importations is that they are from the same country Korea. They are all velvet. This alone is not sufficient to question the transaction value. The charge of undervaluation therefore fails. Since the goods have been confiscated only on the ground of mis-declaration of value, their confiscation and imposition of penalty are not sustainable.
10. It would follow from this that the department’s appeal, seeking enhancement of redemption fine and penalty, fails.
11. The Appeal C/2129/92D is partially allowed to the extent that confiscation of the goods and imposition of penalty on Garment Craft are set aside. Appeal C/1038/93A dismissed.
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