DFIA exemption for imported printing ink does not require physical correlation beyond licence terms

DFIA imports of optical variable ink were treated as eligible for duty-free import where the input matched the licence description, quantity and value limits, and the special physical-correlation requirement in the Handbook applied only to specified products not covering rice packed in printed polypropylene bags. Once the DFIA was transferred, the transferee could import the authorised material without proving actual use in the export product beyond the scheme terms. Allegations of fraud, forged sale letters and related irregularities did not justify denial of exemption where the licensing authority had already upheld the DFIA and the validity finding had attained finality. The article states that the exemption was upheld and the customs demand was not sustainable.

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Issues: (i) Whether imported optical variable ink was covered by the DFIA licences and Notification No. 40/2006-Cus. without proving physical correlation with the export product. (ii) Whether the DFIA licences and release advices were vitiated by fraud so as to justify denial of exemption and duty demand.

Issue (i): Whether imported optical variable ink was covered by the DFIA licences and Notification No. 40/2006-Cus. without proving physical correlation with the export product.

Analysis: The DFIA scheme and Notification No. 40/2006-Cus. permitted duty-free import of inputs described in the authorisation, and the special correlation requirement applied only to the products specified in paragraph 4.55.3 of the Handbook of Procedures. The exported product here was rice packed in printed polypropylene bags, which did not fall within that special category. The imported optical variable ink was classifiable as printing ink and satisfied the description, quantity and value limits in the licences. Once the DFIA was transferred, the transferee was entitled to import the permitted material within the licence terms, without a further burden to match the imported input with the exporter's actual use beyond the scheme requirements.

Conclusion: The import was entitled to the DFIA exemption and the duty demand could not be sustained on the ground of absence of physical nexus.

Issue (ii): Whether the DFIA licences and release advices were vitiated by fraud so as to justify denial of exemption and duty demand.

Analysis: The licensing authority had already examined the matter and upheld the legality of the DFIAs, including adjustment of the quantity error. The customs authorities could not displace that finding on misrepresentation where the licences were validly issued and had attained finality. The allegation of forged sale letters and related irregularities did not establish a customs liability for denial of exemption in the face of the binding DGFT position and the scheme framework. The objection on limitation also did not survive once the licences were treated as valid and the exemption as admissible.

Conclusion: The allegation of fraud and the consequential demand were rejected.

Final Conclusion: The Revenue's challenge failed, the exemption under the DFIA scheme was upheld, and the order dropping the proceedings was sustained.

Ratio Decidendi: Where a DFIA licence is validly issued for a non-specified product under the scheme, customs cannot insist on physical correlation between the imported input and the export product beyond the terms of the licence and the governing notification, and the transferee may claim the exemption if the licence conditions of description, quantity and value are satisfied.

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