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

The High Court dismissed the Revenue's appeal, affirming that M/s. JSG substantially complied with the EXIM Policy and relevant notifications. The court ... 100% EOU - allegation of diversion of the imported duty free raw material through its related firm - Further, during search, As such the officers had drawn a reasonable belief that the goods of foreign origin were not acquired validly and seized the same under Section 110 of the Customs Act, 1962. - Held that:- It is not denied that there might be some lapses in the observance of said notification, however, from the record there is no glaring averment which could establish that there was some deliberate deviation/disposal of material or any other loss to Revenue, but imported/duty free procured material were utilized in accordance with the notifications, for the manufacture of export products which were exported under physical supervision of Central Excise officers. The Hon’ble Apex Court in the case of Mangalore Chemicals & Fertilizers v. Deputy Commissioner [1991 (8) TMI 83 - SUPREME COURT OF INDIA] held that non-compliance with substantive and mandatory requirement fatal but non-compliance with formal and procedural requirement not fatal to the application for grant of permission. We are afraid the stand of the Revenue suffers from certain basic fallacies, besides being wholly technical. - There are condition and conditions, some may be substantive mandatory based on considerations of policy, and some others may merely belong to the area of procedure. - In fact, it is now a trite law that the procedural infraction of notifications/circulars etc. are to be condoned if exports have really taken place and the law is settled now that substantive benefit cannot be denied for procedural lapses. Procedure has been prescribed to facilitate verification of substantive requirements. The core aspect or fundamental requirement for debate is its manufacture and subsequent export. As long as this requirement is met, other procedural deviations can be condoned. All documents relating to removal were under scrutiny by these officers and relevant documents relating to removals were subjected to proper scrutiny. It is relevant from the record that the department did not point out any contraventions. In this background, the issuance of demand in the year 2005 for non-compliance with procedural rules for the year 2001-02 to 2003-04 are unsustainable and liable to be rejected. - Decided against the revenue. 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.