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Kanak Metal Industries v. Commissioner Of Customs, Jodhpur
Concise Analytical Summary of the Court's Order (Mathew John, Member (T))
Factual and Procedural Background
The first appellant is a partnership firm (M/s. Kanak Metal Industries) and the second appellant is its Managing Partner (Shri Mohammad Hussain Gauri). The firm exported stainless steel utensils during 2002-03 to 2004-05 and claimed DEPB (Duty Entitlement Pass Book) benefit, which is proportionate to the FOB value of goods exported. Revenue investigated and alleged that the appellants misdeclared FOB values and Present Market Values (PMV) on the higher side to obtain undue DEPB benefits.
Revenue issued a Show Cause Notice (SCN) proposing confiscation under Sections 113(d) & (i) of the Customs Act, 1962, imposition of a redemption fine under Section 125, and penalties under Section 114(i) and (iii) on both the firm and its managing partner. The adjudicating authority passed an Order‑in‑Original (O‑in‑O) that revised PMV downward, ordered confiscation (for goods already exported), imposed a redemption fine of Rs. 1 crore and penalties amounting to Rs. 8,96,21,671 on the firm and Rs. 1 crore on the managing partner. The appellants challenged that order by filing the present appeal.
Legal Issues Presented
- Whether DEPB benefit entitlement should be calculated on the FOB value or be worked out on PMV (or capped at 50% of PMV) when Revenue concludes that FOB has been artificially inflated.
- Whether an adjudicating authority can substitute or equate FOB value with PMV and thereby revise declared FOB values in an adjudication proceeding.
- Whether the facts as found by Revenue (including the revised PMV) justified confiscation of exported goods under Section 113(d) and (i), imposition of a redemption fine under Section 125 and penalties under Section 114(i) and (iii) of the Customs Act.
- Whether, in the presence of a DEPB value cap for the commodity, PMV verification by Customs is relevant in light of C.B.E.C. Circular 27/2000-Cus. dated 5-4-2000.
Arguments of the Parties
Appellant's Arguments
- Revenue proceeded on the basis of C.B.E.C. Circular 69/97 (dated 8-12-1997) but ignored amendment by C.B.E.C. Circular 27/2000 (dated 5-4-2000), which provides that PMV verification is not applicable where an FOB value cap exists. Since a value cap applied to the relevant utensil exports, PMV enquiry was irrelevant.
- The FOB values declared on the Shipping Bills were realized in export transactions; therefore the FOB price cannot be questioned. (Appellants relied on several decisions to support this contention.)
- They relied on a Larger Bench decision in Advance Exports v. C.C. (name cited by the appellants) to support their position that department had not shown export at a lower price by any other party.
- Because the assessing officer had accepted FOB at the time of export, the FOB cannot be revised in adjudication without following the procedure under Section 129D of the Customs Act (according to the appellants and their authorities).
- The Board’s circular permits DEPB credit subject to a cap of 50% of PMV; as per the appellant the DEPB credit computed on the declared FOB fell within that limit.
- DGFT had not cancelled or modified DEPB licences already granted, which the appellants pointed to as an indication that DGFT had not accepted the departmental view taken in the impugned order.
- They challenged the correctness of the PMV determined by the department on the ground that departmental calculations ignored packing, transport, commission and overheads, and that where AR-4 value is declared as PMV, it should be accepted as per Circular 69/97.
Respondent's (Revenue's) Arguments
- Revenue’s investigations indicated that PMV was substantially lower (about Rs. 65–70 per kg) than the PMV/FOB declared in Shipping Bills (about Rs. 125 per kg), and that in some instances export price was Rs. 123 per kg though local purchase was Rs. 70 per kg.
- On this basis Revenue contended that declared particulars were fraudulent and goods were liable to confiscation under Section 113 of the Customs Act, and penalties should follow under Section 114.
Table of Precedents Cited
Only precedents explicitly mentioned in the opinion are listed. Where the opinion does not state the rule or how the precedent was applied, that limitation is noted.
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Advance Exports v. C.C. (Larger Bench) — (name as cited in the appeal) | The opinion records that appellants relied on this Larger Bench decision to support the proposition that Revenue had not demonstrated export at lower prices by other parties. The O‑in‑O record does not state the exact rule from that decision. | The Court noted that the appellants relied on this decision. The judgment does not record any substantive reliance on or detailed analysis of that decision by the Court in disposing of the appeal. |
Court's Reasoning and Analysis
The Court's analysis proceeds in several linked steps, closely tied to the statutory scheme, DGFT public notice and Board/C.B.E.C. circulars quoted in the record:
- Distinction between FOB and PMV: The Court emphasises that FOB (Free On Board) is the export transaction price between exporter and foreign buyer, whereas PMV (Present Market Value) is an index of the goods' local (domestic) market price inclusive of local duties, taxes and transport. The Court observed that both sides (appellant and adjudicating officer) had at times used these values interchangeably, giving rise to confusion.
- Statutory/Policy framework for DEPB credits: The Court refers to Public Notice para 7.36A (DGFT), which provides that where a DEPB rate is 15% or more the credit amount shall not exceed 50% of PMV. The Court also discusses relevant C.B.E.C. circulars: Circular 69/97 (explaining the rationale and methods of determining PMV, acceptance of AR4 values, tolerance up to 150% of AR4, and other indicia) and Circular 27/2000 (which amended the approach and stated that where an FOB value cap exists PMV need not be verified by Customs).
- Interpretation problem created by later circular: The Court identifies a “sticky confusion” arising from a later C.B.E.C. circular (Circular 77/2002 para 5) which suggests that where it is conclusively proved that FOB has been artificially inflated, DEPB should be worked out on PMV. The Court notes this circular does not clarify whether the DEPB rate itself is to be applied on PMV or whether the resulting benefit should simply be capped at 50% of PMV as per the DGFT public notice — and holds that DGFT's public notice should prevail over CBEC circular insofar as DGFT grants DEPB benefit under its policy.
- Mathematical/benefit analysis: The Court reviews a rough calculation comparing (a) DEPB benefit computed on declared FOB and (b) maximum DEPB permitted at 50% of the PMV as determined by the adjudicating officer. The Court observes that the DEPB credit as computed on declared FOB was less than the 50% PMV cap even using the adjudicated PMV; hence, no excess DEPB benefit accrued to the exporter even accepting the departmental PMV. The Court concludes that Annexure A to the SCN — and the entire case premised on a belief that DEPB benefit had been overly claimed — was founded on a mistaken understanding of the law and facts.
- Illegality of substituting PMV for FOB: The Court finds no legal basis for equating or substituting FOB with PMV; an exporter is legally entitled to sell at a profit and the adjudicating officer could not fix FOB equal to PMV. Therefore the portion of the O‑in‑O that fixes PMV in place of FOB is patently wrong and is set aside.
- Consequences for confiscation and penalties: Because the mistake about PMV appears to stem from a misunderstanding (by the adjudicating officer) rather than from demonstrated intention to obtain undue benefit or clear fraudulent overvaluation that resulted in excess benefit, the Court finds no case made out for confiscation under Section 113(d) & (i). The Court also notes the practical difficulty that goods were not available for confiscation (they had been exported) so confiscation and the redemption fine were not sustainable. Accordingly, penalties under Section 114(i) & (iii) were also held to be unsustainable.
The Court's conclusions were based on the material contained in the record, the relevant DGFT public notice and C.B.E.C. circulars reproduced in the order, and the arithmetic comparison outlined in the order.
Holding and Implications
Two appeals are allowed and the Order‑in‑Original is set aside.
Direct consequences for the parties:
- The portion of the O‑in‑O that attempted to replace or equate declared FOB by the adjudicated PMV is set aside as legally unsupported.
- The Court held that, on the facts and in law as recorded, no case for confiscation under Section 113(d) & (i) of the Customs Act was made out; the redemption fine imposed under Section 125 is not sustainable; and penalties under Section 114(i) & (iii) are also not sustainable. The impugned confiscation, redemption fine and penalties are therefore vacated by virtue of allowing the appeals and setting aside the O‑in‑O.
- The Court observed that the departmental action was founded on a wrong understanding of the law (notably of the relationship between FOB, PMV and the 50% PMV cap) and that no unintended or excess DEPB benefit was shown to have accrued to the exporter under the adjudicated figures.
Broader implications: The opinion addresses a specific adjudication and corrects the misapplication of the DGFT public notice and CBEC circulars in this case; it does not purport to lay down a new precedent beyond the resolution of the disputes between the parties. The order records the view that DGFT public notices (which govern DEPB entitlement) should prevail over unclear departmental circulars on the computation question, but the immediate effect is restoration of the appellants from the adjudicated confiscation and penalties.
Disposition: Appeals allowed; Order‑in‑Original set aside. (Pronounced in open Court on 12-8-2011.)
[Order per : Mathew John, Member (T)]. - The first appellant is a partnership firm. The second appellant is the Managing Partner of the firm. The first appellant is an exporter of stainless steel utensils. It claims DEPB benefit against such exports and such benefit is proportional to the FOB value of goods exported. Revenue has made out a case that during the periods 2002-03 to 2004-05 the FOB values and “Present Market values” for export goods were misdeclared by the appellants on the higher side to claim undue DEPB benefit.
2. Para 7.36A of Public Notice No. 10/97 (P.N.), 97-2002 dated 21-5-1997 provides that the amount of Credit entitlement rate, in respect of export products whose DEPB rate is 15% or more, shall not exceed 50% of the PMV of the goods.
3. The following Circulars of C.B.E. & C. are relevant :
(i) C.B.E.C.’s Circular 69/97-Cus., dated 8-12-1997;
(ii) C.B.E.C.’s Circular 27/2000-Cus., dated 5-4-2000.
3.1 Extracts from C.B.E.C.’s Circular 69/97-Cus., dated 8-12-1997 is reproduced below :
“1. As you are aware para 7.36A of Public Notice No. 10/97 (P.N.), 97-2002 dated 21-5-1997 provides that the amount of Credit entitlement rate, in respect of export products whose DEPB rate is 15% or more, shall not exceed 50% of the PMV of the goods.
2. Object of Limiting the amount of Credit Based on the Present Market Value (PMV) :
The condition of restricting the credit-amount under DEPB Scheme to 50% of the PMV was prescribed to prevent the exporters from obtaining excessive amount of credit by inflating the FOB price of the export product. It is stated that the FOB value may be higher, as per the contract between the exporter and foreign buyer, (depending on various factors) but the “Present Market Value” of the goods in an index of their local (wholesale/retail) price inclusive of excise duty, Sales tax and other local taxes plus cost of transportation. Accordingly the amount of credit is to be restricted with reference to the domestic price of the product, and not with reference to the FOB price declared on the GR Form/Shipping Bill.
3. Determination of PMV
(i) Manufacturers-Exporters
(a) As regards Manufacturers-Exporters who export under AR4 from, where the AR4 value is declared as the PMV, the same shall be accepted.
(b) Where the Manufacturer-Exporter declared PMV which is higher than the AR4 price, (as PMV is inclusive of transportation costs and domestic duties and taxes) the higher PMV declared may be accepted up to 150% of AR4 value (exclusive of excise duty). Market enquiry may be caused only if PMV is more than 150% of AR4 price, and exporter does not agree to lower the PMV below the 150% mark.
(c) Where the Maximum Retail Price (MRP) is required to be printed on the products as per the Weights & Measures Act, the MRP indicated on the products may also be accepted as PMV.
(d) For the products for which manufacturers have a Printed Price list, or a Catalogue indicating the local price of the products, the price indicated on the price list/catalogue shall be accepted as PMV.”
3.2 During the relevant time DEPB benefit was granted on aluminium utensils subject to a value cap of Rs. 125 per Kg. So C.B.E.C.’s Circular 27/2000-Cus., dated 5-4-2000 also is relevant which is reproduced below;
“Subject : Revised guidelines for determination/verification of the Present Market Value (PMV) under DEPB Scheme - Regarding.
Attention is invited to Circular No. 69/97-Cus., dated 8-12-1997, as amended by Circular Nos. 79/98-Cus., dated 22-10-1998, No. 23/99-Cus., dated 11-5-1999 and No. 37/99-Cus., dated 24-6-1999.
2. As a result of the Annual Review of the Exim Policy 1997-2002, para 7.36A of the Handbook of Procedure, Vol. 1 has been amended with effect from 1-4-2000 to the effect that PMV declaration shall not be applicable for products for which value cap exist irrespective of the DEPB rate of the product.
3. In view of the above, it has been decided by the Board that for all products exported under DEPB Scheme, wherever FOB value cap has also been notified along with DEPB rate, PMV will not be verified by the Custom House. Circulars mentioned in the first para above shall also stand amended to this effect.”
4. Revenue conducted investigations about the cost of the goods exported and also about sale price of similar goods in the local market, and also purchase price of some of the goods bought by them from local market and exported. They ascertained the present market value of the goods manufactured in the factory of the appellant at Rs. 65.80 per Kg. They also found that some of the exported goods were bought by them at a price of Rs. 70 per Kg but the goods were exported at a price of Rs. 123 per Kg. Based on such facts Revenue issued a Show Cause Notice proposing action as proposed in para 34 of SCN which is reproduced below :
“34. Now, therefore, M/s. Kanak Metal Industries, 8/2, Jodhana Industrial Estate, Road No. 8 Basni, Jodhpur and Shri Mohammad Hussain Gauri, Managing Partner of M/s. Kanak Metal Industries, Jodhpur are hereby called upon to show cause to the undersigned as to why :
(i) The goods having declared FOB value of Rs. 8.96 crores (correct value Rs. 4,74,22,493/-) exported vide shipping bills as detailed in Annexure-A should not be confiscated under Section 113(d) & (i) of the Customs Act, 1962. Since the said goods have already been exported, why Redemption fine should not be imposed under Section 125 of the Customs Act, 1962.
(ii) Penalty should not be imposed under Section 114(i) and (iii) of the Customs Act, 1962 on M/s. Kanak Metal Industries, Jodhpur.
(iii) Penalty should not be imposed under Section 114(i) and (iii) of the Customs Act, 1962 on Shri Mohammad Hussain Gauri, Managing Partner of M/s. Kanak Metal Industries, Jodhpur.”
5. The Show Cause Notice was adjudicated by the impugned order. The operative part of the order is reproduced below :
“1. I determine the PMV as Rs. 4,74,22,493/- in respect of 33 consignments of S.S. Utensils exported by M/s. Kanak Metal Industries, Jodhpur from ICD Concor, Jodhpur during the period from 2002-03 to 2004-05 in place of the FOB/PMV Rs. 8,96,21,671/- declared by the said exporter and accordingly the benefit claimed under DEPB scheme needs re-consideration.
2. I confiscate the 33 consignments of S.S. Utensils exported by M/s. Kanak Metal Industries, Jodhpur from ICD Concor, Jodhpur during the period from 2002-03 to 2004-05 valued at Rs. 4,74,22,493/- having declared FOB value Rs. 8,96,21,671/- under Section 113(d) and (i) of the Customs Act, 1962. Since the goods have already been exported. I impose Redemption fine of Rs. 1,00,00,000/- (Rs. One crore only) under Section 125 of the Customs Act, 1962.
3. I impose penalty of Rs. 8,96,21,671/- (Rs. Eight crore ninety six lac twenty one thousand six hundred seventy one only) under Section 114(i) and (iii) of the Customs Act, 1962 on M/s. Kanak Metal Industries, Jodhpur).
4. I impose penalty of Rs. 1,00,00,000/- (Rs. One crore only) under Section 114(i) and (iii) of the Customs Act, 1962 on Shri Mohammad Hussain Gauri, Managing Partner of M/s. Kanak Metal Industries, Jodhpur.”
6. Aggrieved by the order the appellants have filed this appeal.
7. For understanding the dispute and the confusion in the SCN and O-in-O a few points have to be noted. These are,-
(i) FOB value and PMV are different. FOB is the value at which goods are sold to the buyer abroad. PMV is the value of the export goods in local market.
(ii) DEPB benefit is to be granted by applying the rate prescribed for the commodity on the FOB value of goods exported.
(iii) If such benefit is more than 50% of the PMV, it is to be restricted to 50% of PMV, Public Notice No. 10/97 (P.N.), 97-2002 dated 21-5-1997 does not say the DEPB rate is to be applied to PMV.
8. To illustrate let the DEPB rate be 20%. Let FOB value be Rs. 100. Exporter can get DEPB credit of Rs. 20. But if PMV is Rs. 30 only then DEPB credit will be Rs. 15 only. Annexure A to SCN is prepared with the understanding that DEPB benefit in such circumstances will be only Rs. 6 and therefore the entire matter is initiated on wrong understanding of the provisions.
9. The confusion in this matter appears to emanate from circular para 5 of C.B.E.C.’s Circular 77/2002-Cus., dated 27-11-2002. Extracts from the circular are given below :
“3. The issue had been examined in consultation with the Directorate General of Foreign Trade. It has been decided in modification of the instruction contained in the above referred circular that as a general rule, FOB value of the exports shall remain the basis for extending the DEPB credit since FOB value is recognised as the basis of export transactions both in the EXIM Policy as well as in the Customs Act, 1962.
4. However, in cases of specific intelligence that the FOB declared is inflated or there is evidence confirming such overvaluation, the field formations should resort to market verification to ascertain the correct market price of the goods. In addition to above, market verification can also be initiated on receipt of intelligence or where the intelligence is gathered in respect of consignments entered for export to sensitive destinations and/or where the goods are sub-standard and it appears that the acceptance of the declared value would result in accrual of substantial unintended DEPB benefits. But all such cases should be taken up for investigation only with the express written approval of the Commissioner of Customs.
5. In those cases where it is conclusively proved through the investigations that the FOB value had been artificially inflated/manipulated by the exporter to avail of unintended higher DEPB benefits, the DEPB credit entitlement shall be worked out only on the PMV and not FOB value.”
10. Para 5 as quoted above does not say whether the DEPB rate is to be applied on the PMV or the benefit should be capped at 50% of PMV which is what the Public Notice issued by DGFT envisages. So this sticky confusion appears to have rolled and gathered many issues that appeared during investigation and became a big mass in the form of the investigations and proceedings in this case and perhaps many more other cases. The instructions of C.B.E.C. in para 4 of circular dated 27-11-2002 quoted has been of little help in stopping such meaningless investigations. DEPB benefit is granted by DGFT. So the public notice issued by DGFT should prevail over the circular of C.B.E.C. which is not very clear on the point whether the rate is to be applied on PMV or benefit is to be capped at 50% of PMV.
11. Apart from the confusion in the above circular, the confusion in this case is based also on the fact that the exporter had declared PMV and FOB price at almost the same level in the shipping Bills and Revenue found that PMV was in fact lower. But the benefit that accrues to the exporter due to wrong declaration of PMV as worked in Annexure-A to the SCN based on a wrong understanding of the Public Notice.
12. The interesting aspect of the O-in-O is that the revision in PMV ordered in the impugned order does not result in excess benefit to the exporter as may be seen from the following rough calculation.
| 1. | FOB Value declared | 89621671 |
| 2. | DEPB benefit at 20% - (actual rate varied from 13% to 20% but for 28 out of 33 Shipping Bills). This is why calculation is stated to be rough. | 17924334 |
| 3. | PMV decided in O-in-O | 47422493 |
| 4. | Maximum DEPB that can be granted @ 50% PMV | 23711246 |
Since amount at S. No. 2 above is less than amount at S. No. 4 above no case of excess DEPB benefit comes out even as per the adjudicated values. So it is obvious that the entire case is based on wrong understanding of facts and law especially the understanding that DEPB benefit is to be restricted to 20% (appr.) of Rs. 47422493 as seen from calculations in Annexure A to SCN. Here the submission of the Appellant that DGFT has so far not revised the DEPB benefit is taken note of.
13. Both the sides occasionally (not consistently) understand that both FOB and PMV are interchangeable. In the first place the appellant has declared the same value as FOB Value and PMV in many shipping bills. On the other hand the adjudicating officer has used the expression “FOB/PMV” is used in para 1 of the operative part of the impugned order. The order fixes PMV of Rs. 4,74,22,493/- in place of “FOB/PMV” of Rs. 8,96,21,671/-. FOB value cannot be ordered to be replaced by PMV value and this portion of the order is patently wrong.
14. The grounds raised on behalf of the appellant are the following :
(a) The department has made this case based on C.B.E.C.’s circular 69/97-Cus., dated 8-12-1997 ignoring amendment to that circular made by circular 27/2000-Cus., dated 5-4-2000. Since DEPB credit was allowed for the goods in question subject to value cap the enquiry regarding PMV is irrelevant as per the latter circular;
(b) The FOB value declared on the shipping Bills were realised. Therefore there is no case to question FOB price. They quoted a few decisions to support this argument;
(c) Department has not produced any evidence of export of such goods at a lower price by any other party. They rely on the decision of the Larger Bench of Tribunal in Advance Exports v. C.C. - ;
(d) Since FOB declared at the time of export was accepted by the assessing officer it cannot be revised without challenging the assessment order under Section 129D of the Customs Act. They have quoted a few decisions to support this argument;
(e) The Board’s circular permits DEPB credit based on 50% of PMV. The DEPB credit based on FOB value is within this limit.
(f) DGFT has still not cancelled or modified the DEPB licences already granted. So it is clear that DGFT does not agree with the impugned order.
15. Further the correctness of the PMV determined by the department is challenged on the following grounds :
(i) The purchase price of export goods were taken without considering other cost elements like packing cost, cost of transportation, commission on sales and overhead expenses.
(ii) As per Board’s Circular 69/97-Cus., dated 8-12-1997, where AR-4 value is declared as PMV the same shall be accepted.
16. The ld. DR on the other hand tries to demonstrate how the PMV declared in Shipping Bills are about Rs. 125 per Kg when the PMV was only about Rs. 65 to Rs. 70 per KG and goes on to argue how goods can be held to be liable to confiscation under Section 113 of the Customs Act when material particulars declared are fraudulent.
17. Considered arguments on both sides.
18. The impugned order holds that the FOB value of export goods should have been declared at the price of the goods in the local market. This is without any legal basis. Any exporter is free to sell goods at a profit. So order fixing FOB value to be equal to PMV is hereby set aside.
19. Prima facie, the Present Market Value is not correctly declared. This mistake appears to emanate from wrong understanding of the expression. When the adjudicating officer himself is confused about this, the exporter cannot be penalised for such discrepancy. No benefit that is accruing to the exporter on account of the misdeclaration comes out. Whatever is demonstrated in Annexure A to SCN is based on wrong understanding of law. In the circumstance no case warranting confiscation of goods under Section 113(d) and (i) is made out. There is also the issue that the goods were not available for confiscation and hence could not have been confiscated and redemption fine imposed.
20. Since no case to hold the goods liable to confiscation is made out penalties imposed under Section 114(i) and (iii) are also not sustainable.
21. With the result the two appeals are allowed by setting aside the Order-in-Original.
(Pronounced in open Court on 12-8-2011)
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