2001 JTR(SC) 613
2001 AIR(SC) 1899 ; 2001 AIR(SCW) 1541 ; 2001 129 ELT 273 ; 2002 1 GLR 485 ; 2001 4 JT 385 ; 2001 3 Scale 170 ; 2001 4 SCC 736 ; 2001 KHC 1819 ; 2001 3 Supreme 131
2001(3) Supreme 131
(From Central Excise Customs and Gold (Control) Appellate Tribunal, Mumbai)
S.P. Bharucha, N. Santosh Hegde and Y.K. Sabharwal, JJ.
M/s. K.R. Steel Union Ltd. -Appellant
versus
Commissioner of Customs, Kandla (Gujarat) -Respondent
Civil Appeal No. 6769 of 1999
Decided on 30-3-2001
Counsel for the Parties :
For the Appellant : V. Lakshmikumaran, A.R. Madhava Rao, C.N. Sree Kumar, Advocates.
For the Respondent : Sanjiv Sen and B.K. Prasad, Advocates.
IMPORTANT POINT
The import of a new Thyristor Converter and the import of new ceramic wool by the appellants under the import licence to import second hand machinery like Temper Mills and Bright Annealing Furnace facility is not a contravention of the import licence as the new parts are necessary to maintain old machinery.
Act Referred :CUSTOMS ACT : S.112(a), S.25(1), S.111(d)
(A) The Customs Act provisions S.112(a), S.25(1), and S.111(d) govern the import of goods into designated zones, requiring strict adherence to licensing conditions while permitting necessary imports for export-oriented production. In this case, the appellant, an approved unit in a Free Trade Zone, sought to import second-hand machinery under Notification 77/90-Cus., which authorized the import of specified capital goods for manufacturing export products. The dispute centered on whether new but necessary componentsspecifically a Thyristor Converter and ceramic woolreplacing old or non-functional parts of an otherwise second-hand Temper Mill and Bright Annealing Furnace fell within the permissible scope of the licence and the exemption notification. The Tribunal and the Collector interpreted the notification differently, with the Collector taking a purposive approach, reading the clauses to include components necessary for the effective operation of permitted second-hand machinery, while the Tribunal applied a strict construction, holding that new parts, even if essential, could not be imported without special Board approval. Section 111(d) and Section 112(a) were invoked to assess whether the imports attracted penalty or were exempt, highlighting the interplay between the object of export promotion and the regulatory control on new imports.
(B) Key legal principles include: (i) exemption notifications under the Customs Act must be construed strictly but purposively to achieve the legislative objective of promoting exports; (ii) components integral to the permitted machinery may be imported if they are necessary for the operation of otherwise eligible second-hand machinery, even if new; (iii) material replaceable periodically does not automatically qualify as a new machinery component; and (iv) the import of new parts requires special Board permission unless clearly contemplated under the licence conditions.
Facts of the case:
The appellant, an approved unit in the Kandla Free Trade Zone licensed to manufacture CRCA and TMBP coils, imported second-hand machinery between 1983 and 1987 under Notification 77/90-Cus. In 1992, Customs alleged that the appellant had imported a new Thyristor Converter and ceramic wool without Board approval, violating the licence conditions. The Collector held that these items were small, integral parts of larger permitted machineryrequired for the Temper Mill and furnace to functionand exempt under the notification as components for export production. The Appellate Tribunal reversed this, deeming the import of new parts non-compliant and directing the levy of penalty. The appellant challenged this before the High Court.
Findings of Court:
The High Court agreed with the Collector that the notifications purpose was to facilitate export manufacturing by allowing necessary imports, and that the Tribunal had adopted an overly technical approach. It held that the Thyristor Converter was an essential 9% component with no practical alternative, and the ceramic wool, though new and periodically replaceable, was indispensable for the furnaces optimal operation. The Court concluded that the imports did not constitute a new machinery breach, provided the overall nature of the machinery remained second-hand, and remitted the matter solely for determining penalty on the special steel plates.
Issues:
(i) Whether new components imported as part of otherwise second-hand machinery fall within the exemption of Notification 77/90-Cus.; (ii) Whether the requirement of prior Board approval applies when such components are essential for the permitted machinerys operation; (iii) How strictly the terms machinery and new parts must be interpreted in the context of exportoriented customs exemptions.
Ratio Decidendi:
The Court applied a purposive interpretation of the exemption notification, emphasizing the objective of promoting exports. It held that integral, necessaryeven if newcomponents imported as part of secondhand machinery do not per se violate the licence conditions, provided the basic character of the machinery remains second-hand and the imports are indispensable for the permitted production purpose.
Result:
The appeal is allowed in part. The Tribunals order is set aside to the extent it penalized the import of the Thyristor Converter and ceramic wool, and the matter is remanded to the Commissioner for determining liability only in respect of the unauthorized import of special steel plates.
(A) The Customs Act provisions S.112(a), S.25(1), and S.111(d) govern the import of goods into designated zones, requiring strict adherence to licensing conditions while permitting necessary imports for export-oriented production. In this case, the appellant, an approved unit in a Free Trade Zone, sought to import second-hand machinery under Notification 77/90-Cus., which authorized the import of specified capital goods for manufacturing export products. The dispute centered on whether new but necessary componentsspecifically a Thyristor Converter and ceramic woolreplacing old or non-functional parts of an otherwise second-hand Temper Mill and Bright Annealing Furnace fell within the permissible scope of the licence and the exemption notification. The Tribunal and the Collector interpreted the notification differently, with the Collector taking a purposive approach, reading the clauses to include components necessary for the effective operation of permitted second-hand machinery, while the Tribunal applied a strict construction, holding that new parts, even if essential, could not be imported without special Board approval. Section 111(d) and Section 112(a) were invoked to assess whether the imports attracted penalty or were exempt, highlighting the interplay between the object of export promotion and the regulatory control on new imports.
(B) Key legal principles include: (i) exemption notifications under the Customs Act must be construed strictly but purposively to achieve the legislative objective of promoting exports; (ii) components integral to the permitted machinery may be imported if they are necessary for the operation of otherwise eligible second-hand machinery, even if new; (iii) material replaceable periodically does not automatically qualify as a new machinery component; and (iv) the import of new parts requires special Board permission unless clearly contemplated under the licence conditions.
Facts of the case:
The appellant, an approved unit in the Kandla Free Trade Zone licensed to manufacture CRCA and TMBP coils, imported second-hand machinery between 1983 and 1987 under Notification 77/90-Cus. In 1992, Customs alleged that the appellant had imported a new Thyristor Converter and ceramic wool without Board approval, violating the licence conditions. The Collector held that these items were small, integral parts of larger permitted machineryrequired for the Temper Mill and furnace to functionand exempt under the notification as components for export production. The Appellate Tribunal reversed this, deeming the import of new parts non-compliant and directing the levy of penalty. The appellant challenged this before the High Court.
Findings of Court:
The High Court agreed with the Collector that the notifications purpose was to facilitate export manufacturing by allowing necessary imports, and that the Tribunal had adopted an overly technical approach. It held that the Thyristor Converter was an essential 9% component with no practical alternative, and the ceramic wool, though new and periodically replaceable, was indispensable for the furnaces optimal operation. The Court concluded that the imports did not constitute a new machinery breach, provided the overall nature of the machinery remained second-hand, and remitted the matter solely for determining penalty on the special steel plates.
Issues:
(i) Whether new components imported as part of otherwise second-hand machinery fall within the exemption of Notification 77/90-Cus.; (ii) Whether the requirement of prior Board approval applies when such components are essential for the permitted machinerys operation; (iii) How strictly the terms machinery and new parts must be interpreted in the context of exportoriented customs exemptions.
Ratio Decidendi:
The Court applied a purposive interpretation of the exemption notification, emphasizing the objective of promoting exports. It held that integral, necessaryeven if newcomponents imported as part of secondhand machinery do not per se violate the licence conditions, provided the basic character of the machinery remains second-hand and the imports are indispensable for the permitted production purpose.
Result:
The appeal is allowed in part. The Tribunals order is set aside to the extent it penalized the import of the Thyristor Converter and ceramic wool, and the matter is remanded to the Commissioner for determining liability only in respect of the unauthorized import of special steel plates.
JUDGMENT
Santosh Hegde, J.-This appeal is directed against the order of the Customs, Excise and Gold (Control) Appellate Tribunal, (the tribunal ), West Regional Bench, Mumbai dated 15th July, 1999 made in Appeal No.C/366/94A.
2. The appellant which is an approved unit situated in the Kandla Free Trade Zonc (KFTZ) was authorised to manufacture one lakh ton of Cold Rolled Closed Annealed (CRCA) and Tin Mill Black Plate (TMBP) Coils per year under a licence issued by the Ministry of Commerce, Government of India on 30.3.1981. The said Ministry by a letter dated 2.7.1982 approved the proposal of the appellant for import into the KFTZ of second-hand machinery for the purpose of the manufacture of the CRCA and TMBP under certain conditions which included that the imported machineries should not be over 10 years old and it should have a residual life of at least 5 years. Bases on the said permission, the appellant imported between the period 1983 and 1987 second hand machineries as capital goods for which they had filed as many as 17 Bills of Entry and claimed the benefit of Notification No. 77/90-Cus. dated 17.4.1980. On 7.2.1992, the Customs Authorities issued a show-cause notice to the appellant alleging among other grounds that the appellant had imported contrary to the import licence, one new Thyristor Converter over and above the Motor Generator Set, a part of the Temper Mill and certain quantity of ceramic wool as a new component for the purpose of fabrication of the Bright Annealing Furnace.
3. In the proceedings before the Collector of Customs, the appellant contended that the import was made with the permission of the authorities of KFTZ issued to them vide permission letter No.FTZ/Adm/2/822/90-IV/4750 dated 25/30.4.1991. They also contended that the import made by them was governed by the import export policy applicable for the year 1983-84 and the Thyristor Converter system was imported as a part of the complete Temper Mill which was in a second-hand condition. The said Thyristor Converter though was a new part of the Temper Mill, the same constituted in value equivalent to only 9% of the total value of the Temper Mill and this particular machinery part was imported as an alternative to Motor Generator Set which was supplied in a non working condition by the supplier. Similarly, it was contended that so far as ceramic wool which was also a new component of the annealing furnace, the same had to be new since the said ceramic wool had a limited life span, hence when a second-hand annealing furnace was to be installed, it was imperative that the ceramic wool in the same had to be replaced with new wool because the old ceramic wool had outlived its utility.
4. The Collector as per his order dated 31.3.1993 substantially dropped the charges levelled in the show cause notice and came to the conclusion that the machineries imported viewed as a whole was substantially old and that the Thyristor Converter was an essential part of the Temper Mill, and except for this particular part all other components of the Temper Mill were second-hand. He was also of the opinion that the ceramic wool which was a part of the annealing furnace was a periodically replaceable part, hence, same cannot be individually treated as a new machinery, therefore, was of the opinion that the import in question was covered by Notification 77/80-Cus. and that the entire imported machinery after fabrication remained within the KFTZ and was used for the purpose of export production, accordingly he did not consider it necessary to either impose the penalty and duty as reflected in the show-cause notice nor did he think it necessary to confiscate the goods.
5. As noticed above, the Department being aggrieved by the said order of the Collector filed an appeal before the tribunal, who by its order dated 6.8.1989 allowed the Department s appeal holding that the import in question was in contravention of the import export policy as well as the Notification issued thereunder and was also made without the approval of the KFTZ Board. Consequently, it remanded the matter to the Commissioner for the limited purpose of adjudicating the liability of the respondent to pay penalty for the irregularity committed in the import. It is against this order of the tribunal the above appeal is preferred.
6. The only question that arises for our consideration in this appeal is whether the import of Thyristor Converter and the ceramic wool by the appellant as parts of the Temper Mill and Bright Annealing Furnace is in contravention of the import permit issued to the appellant.
7. In this regard, it is to be seen that under the import licence issued to the appellant, it was permitted to import into India second-hand machinery of the following descriptions:
(a) Temper Mills;
(b) Reversing Cold Reduction Mill;
(c) Continuous Pickle line;
(d) Bright Annealing Furnace Facility; and
(c) Reconditioned second hand cylindrical roll grinding mines.
8. This permission does not indicate that each and every part of the above machinery should necessarily be second hand.
9. It is seen from the order of the Collector that after examining the machinery in question, he came to the conclusion that the import of Thyristor Converter and ceramic wool was as a small part of the larger machinery permitted to be imported for the manufacture of 1 lakh tons of CRCA and TMBP Coils per annum which production was purely for the purpose of export. These two imported items in the opinion of the Collector were integral parts of the larger machinery permitted to be imported. In his opinion these parts could be imported because they are being used in connection with the production of goods for export. Therefore, he held that the materials imported by the appellant were covered as components for assembling certain capital goods which will be used for production of goods for export. He also noticed the fact that since the Temper Mill, furnaces and other equipments imported after fabrication has to remain in the KFTZ and will be exporting all its production, keeping in mind the object of the Notification, he did not think it was necessary to invoke the provisions of Section 111(d) and 112(a) of the Customs Act on the facts of this case. But the tribunal has differed from this view taken by the Collector holding that the Notification in question did not permit the import of any new part or replacement material and further held that the Notification in question being an exemption Notification, the same will have to be construed strictly, hence, the extended meaning sought to be given by the Collector to the words: "for being used in connection with production" was rather fanciful.
10. In our opinion, a Notification like the one which falls for our consideration (77/80-Cus.) cannot be read in a narrow manner so as to defeat the object of the Notification because the notification in question permits the importation of certain second-hand machinery to be used in the manufacture of goods meant only for export in units situated in the defined Zones. The object and purpose of such exemption notification is to encourage exports by granting exemption from customs duty on materials that are required to be imported for the purpose of manufacture of resultant products which are to be exclusively exported. The words of the notification have to be construed keeping in view the said object and purpose of the exemption. This is also the view taken by this Court in the case of Oblum Electrical Industries Pvt. Ltd., Hyderabad v. Collector of Customs1, This Court in that case while construing the words: "materials required to be imported for the purpose of manufacture of products" found in Notification 116-88-Cus. similar to the Notification involved in this case held:
"The wordings in the notification have to be construed keeping in view the said object and purpose of the exemption. In the notification two different expressions have been used, namely, "materials required to be imported for the purpose of manufacture of products" and "replenishment of materials use in the manufacture of resultant products" which indicates that the two expressions have not been used in the same sense. The former expression cannot be construed as referring only to materials which are used in the manufacture of the products. The said exemption must be given its natural meaning to include materials that are required in order to manufacture the resultant products. On that view, the exemption cannot be confined to materials which are actually used in the manufacture of the resultant product but would also include materials which though not used in the manufacture of the resultant product are required in order to manufacture the resultant product."
11. We respectfully agree with view taken by this Court in the above cited case and in that view of the matter we are of the opinion that the tribunal erred in reversing the finding of the Collector by adopting a very narrow approach while construing the words "for being used in connection with the production of goods for export".
12. Coming to the factual matrix of the case, we see while the Collector came to the conclusion on facts that both the Thyristor Converter and the ceramic wool were only small parts of the larger machinery permitted to be imported, the tribunal proceeded on a technical ground that since these parts were new it required special permission of the Board without examining whether the object of the import could have been achieved by either not import the said parts or by importing old Thyristor converter or used ceramic wool. As a matter of fact, if the tribunal had come to the conclusion that either the Thyristor converter or the ceramic wool were not necessary parts of the Temper Mill and the furnace, or that these parts were being imported for purposes other than for the use in the Temper Mill and the furnace then the view taken by the tribunal could have been justified. But once it came to the conclusion that both the Temper Mill and the annealing furnace is imported in a second hand condition and these parts were necessary for the working of that machinery, it ought not to have interfered with the order of the Collector because these parts even though new were only a small constituent of the larger machinery. In the instant case, the Thyristor Converter constituted only 9% of the total value of the Temper Mill while ceramic wool which has a life span of only 5 years had to be replaced because the furnace without the same would not have performed to its optimum capacity with the old ceramic wool. In our opinion, unless it can be established that in the guise of importing a second hand machinery in fact the importer has imported substantially a new machinery, it is not possible to come to the conclusion that the import was in contravention of the import licence keeping in mind the object of the import licence granted to the appellant.
13. We also notice while coming to the conclusion that the Thyristor Converter is an absolute necessity the Collector relied on the Inspection Report of M/s. Dona Electricals Pvt. Ltd. The said Inspection Report given after examination of the concerned machinery and its drawings had stated : "in the absence of complete M.G. system, a substitute Thyristor control system is only alternative and imperative". This observation in the Inspection Report relied upon by the Collector clearly shows that the Temper Mill would be incomplete and be of no use without the import of Thyristor control system. Therefore, the finding of the tribunal that the report of M/s Dona Electricals does not support the view taken by the Collector also cannot be sustained.
14. In regard to the import of the ceramic wool, it is to be noted that the Collector came to the conclusion that the said ceramic wool is a component which is fitted into the furnace as a periodically replaceable part and in the normal course has a life span was only five years. Therefore, in his opinion, while importing second-hand annealing furnace if the importer has replaced the periodically replaceable ceramic wool with a new one which also has a limited life span, same cannot be construed as importing a new machinery because in the opinion of the Collector there is nothing improper in importing second-hand machinery with certain parts which require periodical replacement with new parts so long as the nature of the basic machinery so imported remains to be a second-hand machinery. The tribunal though agreed with the finding of the Collector that the ceramic wool is a periodically replaceable part still held prior permission of the Board was necessary for such machinery which we find difficult to sustain in the view taken by us herein above.
15. For the reasons stated above, we are in agreement with the view expressed by the Collector, hence, we reverse the finding of the tribunal to the extent it is challenged before us. We make it clear that the appellant has not questioned the finding of the tribunal in regard to the import of special steel plates weighting about 11 M.T. To this extent, the order of the tribunal remains undisturbed and as directed by the tribunal the matter shall stand remanded to the Commissioner for considering the liability of the appellant to pay penalty for the unauthorised import of the said special steel plates.
16. The appeal is allowed to the extent aforesaid. No costs.
(N.K.R.) Appeal allowed in part.
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Parallel Citations of other Journlas :
K.R. Steel Union Ltd. v. Commissioner of Customs, Kandla, 2001(3) Supreme 131 : 2001 (129) ELT 273 : 2001 (4) JT 385 : 2001 (75) ECC 8 : 2001 (43) RLT 877 : 2001 (96) ECR 209 : (2001) 4 SCC 736 : AIR 2001 SC 1899
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