2010 (2) TMI 6 - SC - Customs

No full and true disclosure under Section 127B, exemption under Notification 211/83-Cus denied for ship spares sale

SC upheld the HC's dismissal of the writ petition and affirmed the Settlement Commission's order. It held that the appellant had not made a 'full and true ... Full and true disclosure by the appellant under Section 127B of the Customs Act, 1962 - Ship Spares - Wrong availment of benefit of exemption notification - Notification No.211/83-Cus dated 23rd July, 1983 - import of multiple consignments of engineering cargo as 'Ship Spares' - applicability of Sections 54 and 69 - Legality of the High Court's Dismissal of the Writ Petition Affirming the Settlement Commission's Decision - HELD THAT:- It is manifest from a bare reading of the provision that in the application filed under Section 127B, an applicant is required to make a full and true disclosure of his duty liability, which he had failed to disclose before the proper officer. He is also required to exhaustively explain to the Settlement Commission the manner in which such liability has been incurred; the additional amount of customs duty accepted to be payable by him as also the price of such dutiable goods in respect of which he admits short levy on account of misclassification or otherwise of goods. In other words, the applicant is supposed to make a clean breast of his affairs in regard to short levy or non payment of customs duty admitted to be payable by him. It is evident that the unequivocal stand of the appellant was that the material imported by them was installed/used for repairs of ocean going vessels directly by them with the assistance of M/s Elektronik Lab, an authorised agent in India of the foreign supplier from whom the appellant had imported the goods. Taking into consideration the documents on record and the sale pattern of the goods and not the value addition, the Settlement Commission came to the conclusion that in the first instance, the goods in question were sold by the appellant to M/s Elektronik Lab and then by the latter to the ship owners under the cover of their own sales invoices and, therefore, the appellant was not entitled to duty exemption under the said Notification. Similarly, M/s Elektronik Lab were also not eligible for duty exemption under the said Notification because they were not registered with the Director General of Shipping, Government of India, as required under the Exemption Notification. As stated above, before the High Court an unsuccessful attempt was made to lay more emphasis on exemption from payment of customs duty on eight consignments in terms of Sections 54 and 69 of the Act and not under the Exemption Notification No.211/83-CUS dated 23rd July, 1983. Thus, there was a shift in the stand of the appellant before the High Court when sale of the imported components by them to a third party stood proved on the basis of overwhelming documentary evidence on record, disentitling them to the benefit of the exemption notification. In the final analysis, the High court came to the conclusion, and in our opinion correctly, that in the light of the material available on record, the order of the Settlement Commission did not suffer from any error warranting its interference. Applicability of Sections 54 and 69 - It is clear that since M/s Elektronik Lab. was not registered with the Director General of Shipping, they were not eligible to avail of duty exemption under the said notification, they entered into an arrangement with the appellant, a registered ship repairing unit, to import the goods for repair of ocean going vessels without payment of import duty under the Exemption Notification. Thus, the sole object of the transactions was to avail of duty exemption under the said notification. Additionally, in order to claim the benefit of the Exemption Notification, the components, consumables etc. had to be used by the importer himself for repair of the vessels and not through someone else, who incidentally was not even named in the shipping bills. Moreover, proper accounts of imports, use and consumption of such goods was to be maintained by the importer, and in the event of failure to render the account for such consumption, the importer was liable to pay the customs duty as may be demanded by the Commissioner of Customs. However, once the imported goods were sold to a third party, the appellant was incapacitated from maintaining and rendering the account to the Commissioner in terms of the notification. All these factors go to show that the additional ground sought to be raised before the High Court was not only an after thought, adjudication thereon did involve investigation into facts and, therefore, the decision of the High court in not entertaining the additional ground did not suffer from any infirmity. We also find substance in the contention of learned counsel for the Revenue that having observed that the appellant had not made a full and true disclosure, their application should have been rejected by the Settlement Commission on that count itself and no relief should have been granted to the appellant. However, in view of the fact that order dated 8th February, 2001 passed by the Settlement Commission allowing the application of the appellant to be proceeded was not challenged by the Commissioner nor such a plea was urged by the Revenue before the High Court or in their reply to the present appeal, we find it difficult to reject the application at this stage, though, having perused some of the documents available on record, we are convinced that the appellant had not made a full and true disclosure of its affairs before the Settlement Commission. Be that as it may, we are of the opinion that having opted to get their customs duty liability settled by the Settlement Commission, under Chapter XIVA of the Act, the appellant cannot be permitted to dissect the Settlement Commission's order with a view to accept what is favourable to them and reject what is not. Having considered the rival submissions with reference to the pleadings, the provisions of Section 127B of the Act and exemption notification No.211/83 dated 23rd July, 1983, we are of the opinion that the order of the Settlement Commission did not suffer from any error, legal or factual, and, therefore, the High Court was fully justified in dismissing the writ petition. 1. ISSUES PRESENTED AND CONSIDERED (1) Whether the appellant was entitled to exemption from customs duty under Exemption Notification No. 211/83-Cus dated 23 July 1983 in respect of imported ship spares/navigational equipment which were sold to a third party not registered as a ship repair unit. (2) Whether the appellant could, at the writ stage, be permitted to raise a new ground based on Sections 54 and 69 of the Customs Act, 1962 (transhipment/warehoused goods for exportation) to contend that no customs duty was leviable on eight consignments, despite not having raised such a plea before the adjudicating authority, the Tribunal or the Settlement Commission. (3) Whether, in the facts, an application under Section 127B of the Customs Act for settlement before the Settlement Commission was maintainable when the appellant's new stance was that no customs duty was payable on eight consignments. (4) What is the effect of the 'full and true disclosure' requirement under Section 127B and the scheme of Chapter XIVA on (a) the appellant's shifting stands, and (b) its attempt to dissect the order of the Settlement Commission and challenge only the adverse portion before the High Court and the Supreme Court. 2. ISSUE-WISE DETAILED ANALYSIS Issue (1): Entitlement to exemption under Notification No. 211/83-Cus Legal framework (a) Exemption Notification No. 211/83-Cus exempts capital goods, components, raw materials and consumables imported 'for repairs of ocean-going vessels' by a 'ship repair unit registered with the Director General of Shipping' from customs duty, subject to conditions, inter alia:     (i) maintenance of proper accounts of import, use and consumption and periodic submission to the Collector of Customs; and     (ii) execution of bond to pay duty on goods not proved to have been installed, used or consumed for the specified purpose within the stipulated period. (b) The Court reiterated that exemption notifications must be strictly construed; a person claiming exemption must strictly satisfy the eligibility conditions. Interpretation and reasoning (c) The Court held that the Notification lays down two cumulative foundational conditions: (i) the goods must be required for repair of ocean-going vessels; and (ii) import must be by a ship repair unit registered with the Director General of Shipping. Both must be strictly fulfilled for availing exemption. (d) Before the Settlement Commission, the appellant's categorical stand was that no sale of imported goods had been made to M/s Elektronik Lab; the goods were allegedly installed by the appellant on vessels 'with the assistance' of M/s Elektronik Lab as authorised agents of the foreign supplier, and the Notification did not bar taking such assistance. (e) Upon direction of the Settlement Commission, the jurisdictional Commissioner produced sale invoices, delivery challans and related documents showing:     (i) the appellant had sold the imported ship spares/navigational equipment to M/s Elektronik Lab; and     (ii) M/s Elektronik Lab in turn sold the same items to ship owners under their own invoices, at higher prices, evidencing a distinct trading transaction and value addition. (f) The Settlement Commission, relying on this documentary evidence and the sale pattern (and not merely value addition), found as a fact that:     (i) the first sale was by the appellant to M/s Elektronik Lab; and     (ii) the second sale was by M/s Elektronik Lab to ship owners, in the nature of home consumption. (g) The Court accepted these findings and held that once the appellant had sold the imported goods to M/s Elektronik Lab, the essential condition that the importer-ship repair unit itself should use/install the goods for repair of ocean-going vessels was not satisfied. (h) Further, M/s Elektronik Lab was admittedly not registered with the Director General of Shipping and could not, in its own right, avail the exemption. Routing the imports through the registered appellant to pass on the goods to an unregistered entity was held to defeat the strict conditions of the Notification. (i) The Court also noted that, after sale to the third party, the appellant was incapable of maintaining and rendering the mandated accounts of import, use and consumption to the Collector of Customs, as required by the Notification, further undermining its claim to exemption. Conclusions (j) The appellant failed to satisfy the cumulative and strict conditions of Notification No. 211/83-Cus, as the imported goods were sold to an unregistered third party which itself effected installation and sale to ship owners. (k) The appellant was therefore not entitled to exemption under the Notification; the Settlement Commission was justified in sustaining the duty demand, and the High Court rightly refused to interfere. Issue (2): Raising a new legal ground under Sections 54 and 69 at the writ stage Legal framework (a) Sections 54 and 69 of the Customs Act relate respectively to transhipment of goods and clearance of warehoused goods for exportation; where goods are in transhipment or cleared from warehouse for export, no import duty is generally leviable. (b) The Court accepted the general proposition that High Courts (and the Supreme Court) may entertain additional grounds raising pure questions of law, even for the first time, where such grounds do not require investigation of facts. Interpretation and reasoning (c) The appellant, for the first time in the amended writ petition, contended that eight consignments were covered by transhipment and warehousing-for-export procedures under Sections 54 and 69, and hence not dutiable. This ground had not been raised:     (i) before the adjudicating Commissioner in response to the show cause notices;     (ii) before the Tribunal; or     (iii) before the Settlement Commission in the Section 127B application or in the proceedings thereon. (d) The Court observed that this newly asserted position was in substance contradictory to the appellant's original case, which was founded exclusively on the exemption Notification and on the assertion that the goods had not been sold but used by the appellant itself. (e) On facts already found by the Settlement Commission and supported by documents:     (i) the goods had been sold by the appellant to M/s Elektronik Lab; and     (ii) bills of transhipment and bills of export were filed by the appellant after property in the goods had passed to M/s Elektronik Lab. (f) The Court held that determining whether Sections 54 and 69 were properly attracted would require factual examination of the nature, timing and purpose of the alleged transhipment and export, the true beneficiary, and the actual chain of transactions, all in the context of the already established sale pattern and the object of routing the goods through the appellant to obtain exemption. (g) In these circumstances, the Court held that the additional ground was not a pure question of law; adjudication on it would inevitably involve investigation and evaluation of facts already found against the appellant, coupled with a shift from its earlier stand. Conclusions (h) The High Court was justified in refusing to entertain the additional ground based on Sections 54 and 69, as it was belated, inconsistent with the earlier case of the appellant, and fact-dependent. (i) The decision of the High Court not to allow the appellant to urge this new ground did not suffer from any legal infirmity. Issue (3): Maintainability of an application under Section 127B when stance is that no duty is payable Legal framework (a) Section 127B permits an application to the Settlement Commission by an importer, exporter or other person 'containing a full and true disclosure of his duty liability which has not been disclosed before the proper officer', explaining how that liability has been incurred, and specifying the additional amount of customs duty accepted to be payable and other particulars. Interpretation and reasoning (b) The Court held that Section 127B presupposes that the applicant accepts the existence of some additional customs duty liability not previously disclosed - i.e., the disclosure is of concealed or undisclosed duty liability voluntarily brought before the Settlement Commission. (c) Once, at the writ stage, the appellant took the position that no duty at all was payable on the eight consignments because they were allegedly covered by Sections 54 and 69, the Court observed that, on the 'plain language' of Section 127B, an application seeking 'settlement' of a non-existent or zero duty liability would not be maintainable. (d) The Court noted that, if the appellant genuinely believed no duty was payable on those consignments, there was no occasion either to withdraw its appeal before the Tribunal or to seek settlement under Chapter XIVA for those consignments. Conclusions (e) On the statutory scheme, an application under Section 127B is maintainable only when it discloses an undisclosed or concealed duty liability voluntarily admitted by the applicant; a claim that no duty is payable on certain consignments is conceptually inconsistent with the premise of Section 127B. (f) This inconsistency further supported the view that the new Sections 54/69 plea was an afterthought and that the appellant could not use the settlement machinery and then resile to a 'no-duty' stance. Issue (4): 'Full and true disclosure' under Chapter XIVA and the ability to dissect the Settlement Commission's order Legal framework (a) Under Section 127B, the applicant must make a 'full and true disclosure' of duty liability not disclosed to the proper officer, and explain the manner in which such liability has been incurred. (b) Section 127C sets out the procedure: the Settlement Commission calls for a report from the Commissioner of Customs and, on that basis and having regard to the case's nature and complexity, allows or rejects the application, and passes a final order under Section 127C(7). (c) Section 127H permits the Settlement Commission to grant immunity from penalty and prosecution if satisfied that the assessee has made a full and true disclosure. (d) Section 127J provides that every order of settlement under Section 127C(7) shall be conclusive as to matters stated therein and that no matter covered by such order shall be reopened in any proceeding under the Act or any other law, save as provided in Chapter XIVA. Interpretation and reasoning (e) The Court emphasized that the scheme of Chapter XIVA is premised on a clean, voluntary disclosure by the applicant - 'a clean breast' of all matters relating to short levy or non-payment of duty - in exchange for a composite, conclusive settlement, including possible immunity from penalty and prosecution. (f) The Settlement Commission had itself recorded that the appellant had not made a full and true disclosure of its affairs, as the appellant's initial stand (no sale to M/s Elektronik Lab; self-use with assistance) was contradicted by documentary evidence demonstrating sale to M/s Elektronik Lab, which was deliberately not disclosed. (g) The Court acknowledged that, in principle, once a lack of full and true disclosure is established, the Settlement Commission could reject the application and deny the benefit of the settlement mechanism. However, since the interim order dated 8 February 2001, allowing the application to be proceeded with, had not been challenged by the Revenue and no such plea was urged before the High Court or in the appellate reply, the Court declined to invalidate the application at this later stage. (h) Nonetheless, the Court clearly found, on perusal of the record, that the appellant had not made a full and true disclosure before the Settlement Commission. (i) On the effect of the appellant's attempt to accept favourable parts of the settlement order (e.g., waiver of penalty above Rs. 18 lakhs and immunity from prosecution) while challenging the duty demand, the Court stressed the nature of the settlement mechanism as a 'compromise measure' intended for one-time, composite resolution, with the applicant disgorging what the Commission fixes to 'buy quittance' and avoid prolonged litigation. (j) The Court held that an applicant who has voluntarily opted to get its liability settled under Chapter XIVA cannot thereafter be permitted to dissect the Settlement Commission's order, accept what is beneficial, and challenge what is adverse. The settlement order, based on the disclosures and the Commissioner's reports, is meant to be conclusive under Section 127J as to matters covered by it. (k) The Court also stated that, since the Commission's orders (both interim and final) are premised on the disclosures made in the Section 127B application and on the Commissioner's reports, the applicant cannot be allowed to resile from its pleadings or to set up a new case before higher fora inconsistent with what was disclosed before the Commission. Conclusions (l) Although, procedurally, the Court did not annul the settlement on the ground of absence of full and true disclosure owing to the Revenue's failure to challenge the interim order, it held that:     (i) the appellant had in fact failed to make a full and true disclosure;     (ii) the appellant, having chosen the settlement route, could not later challenge only the adverse part of the Settlement Commission's order; and     (iii) the High Court correctly refused to interfere with the conclusive settlement order in the circumstances. (m) Overall, the Court held that the order of the Settlement Commission was free from legal or factual error, and the High Court was justified in dismissing the writ petition; consequently, the appeal was dismissed with costs.