2015 (7) TMI 379 - HC - Customs

Court Upholds Substantial Compliance Doctrine in Tax Appeal

COMMR. OF CUS. & C. EX. Versus J.S. GUPTA AND SONS

COMMR. OF CUS. & C. EX. Versus J.S. GUPTA AND SONS - 2015 (318) E.L.T. 63 (All.) Issues Involved:1. Compliance with the EOU scheme and EXIM Policy.2. Alleged diversion of duty-free imported raw materials.3. Procedural lapses in sending goods for job work.4. Validity of the demand and penalties imposed by the Commissioner of Central Excise.5. Applicability of substantial compliance doctrine.Detailed Analysis:1. Compliance with the EOU Scheme and EXIM Policy:The entity M/s. JSG, a 100% Export Oriented Unit (EOU), was granted permission under the EXIM Policy to import raw materials duty-free for manufacturing export goods. The conditions included exporting the entire production, maintaining proper accounts, and carrying out substantial manufacturing activities within bonded premises. The EOU was also required to comply with various notifications and circulars, including maintaining detailed accounts and obtaining necessary permissions for job work.2. Alleged Diversion of Duty-Free Imported Raw Materials:The controversy arose when the department received information about M/s. JSG allegedly diverting duty-free imported raw materials to its sister concern, M/s. CLG. Searches conducted at both premises revealed shortages of imported goods at M/s. JSG and the presence of such goods at M/s. CLG without proper documentation. The department alleged that M/s. JSG diverted duty-free materials instead of using them for manufacturing export goods, violating the EXIM Policy and relevant notifications.3. Procedural Lapses in Sending Goods for Job Work:M/s. JSG admitted that there might have been procedural deviations in sending goods for job work to M/s. CLG. However, they contended that all goods sent out were received back and properly accounted for. The adjudicating authority constituted a committee to inspect the documents and verify the claims. The procedural lapse of not obtaining prior permission for job work was later regularized by M/s. JSG by obtaining the requisite work order from the jurisdictional Commissioner.4. Validity of the Demand and Penalties Imposed by the Commissioner of Central Excise:The Commissioner of Central Excise, Meerut-II, confirmed a duty demand of Rs. 10,83,063 under Section 72 of the Customs Act, 1962, read with Section 28 of the Customs Act, 1962, and Section 11A of the Central Excise Act, 1944. Penalties were also imposed on M/s. JSG and M/s. CLG under various sections of the Customs Act and Central Excise Act. However, the Tribunal rejected the appeal filed by the Revenue, observing that the factory operated under the supervision of Central Excise officers, and all documents were scrutinized without pointing out any contraventions. The Tribunal emphasized that the demand for non-compliance with procedural rules years later was unjustified, especially in the absence of evidence showing sale of imported goods in the local market.5. Applicability of Substantial Compliance Doctrine:The Tribunal and the High Court both held that M/s. JSG had substantially complied with the provisions of the EXIM Policy and relevant notifications. The High Court cited the Supreme Court's judgment in Mangalore Chemicals & Fertilizers v. Deputy Commissioner, emphasizing that non-compliance with substantive and mandatory requirements is fatal, but non-compliance with procedural requirements is not. The court concluded that procedural lapses should be condoned if exports have taken place, and substantive benefits cannot be denied for procedural lapses. The High Court approved the detailed and well-reasoned order passed by the adjudicating authority and the Tribunal, rejecting the Revenue's appeal.Conclusion:The High Court dismissed the appeal filed by the Revenue, holding that M/s. JSG had substantially complied with the EXIM Policy and relevant notifications. The court emphasized that procedural lapses should not result in denial of substantive benefits, especially when the core requirement of manufacturing and exporting goods was met. The appeal was dismissed, and all questions of law were answered in favor of the assessee.