Exemption scheme liability turns on actual importer status; belated Modvat reversal does not cure breach by supporting manufacturers.

Customs duty, confiscation, and penalty under an exemption scheme cannot be fastened on a licence holder unless the notice and evidence establish that it was the actual importer or otherwise legally chargeable. On the facts, the supporting manufacturers imported the goods and filed the bills of entry, so liability could not be shifted to the licence holder; its liability was set aside. By contrast, the supporting manufacturers' sale of the imported goods in the open market and availment of Modvat credit breached the exemption and import policy conditions, and later reversal of credit did not cure the violation; their penalty was upheld, subject to reduction.

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Issues: (i) Whether the licence holder could be fastened with customs duty, confiscation, and penalty when the goods were imported and the bills of entry were filed by the supporting manufacturers as letter of authority holders; (ii) Whether the supporting manufacturers' sale of the imported goods in the open market and availing of Modvat credit, followed by later reversal, amounted to violation of the exemption conditions and attracted confiscation and penalty.

Issue (i): Whether the licence holder could be fastened with customs duty, confiscation, and penalty when the goods were imported and the bills of entry were filed by the supporting manufacturers as letter of authority holders.

Analysis: The exemption scheme contemplated that the licence remained in the name of the licence holder, while the letter of authority holder could only act on behalf of the licensee for limited operational purposes. However, the record and the show cause notices showed that the supporting manufacturers were the persons who actually imported the goods and filed the bills of entry in their own names. The notice did not establish that the licence holder paid for the goods, acted as importer in fact, or that duty could be recovered from it only on failure by the supporting manufacturers in the manner alleged. Liability could not be shifted beyond the show cause notice, and the definition of importer in the Customs Act could not be applied mechanically to make the licence holder the importer on these facts.

Conclusion: The licence holder was not liable for the customs duty, confiscation, or penalty on these imports, and the appeals of the licence holder were allowed.

Issue (ii): Whether the supporting manufacturers' sale of the imported goods in the open market and availing of Modvat credit, followed by later reversal, amounted to violation of the exemption conditions and attracted confiscation and penalty.

Analysis: The exemption notification and the import policy required compliance with the stipulated conditions, including the actual user restriction and the bar against availing Modvat relief where the policy so required. The evidence and admissions showed that the supporting manufacturers sold the imported materials in the open market and had availed Modvat credit. Reversal of credit at a later stage did not cure the breach. Their conduct constituted violation of the policy and the notification conditions, warranting confiscation and penalty, though the penalty was reduced by the Tribunal.

Conclusion: The supporting manufacturers were found in violation of the exemption conditions and were liable to penalty, subject to reduction as ordered by the Tribunal.

Final Conclusion: The liability of the licence holder was set aside, while the violations by the supporting manufacturers were upheld and their penalties were maintained with reduction.

Ratio Decidendi: Customs duty and related penal liability under an exemption scheme cannot be fastened on a licence holder unless the show cause notice and evidence establish that it was the importer or otherwise the person legally chargeable, while breach of exemption conditions by the actual importing parties is not cured by belated reversal of Modvat credit.

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