Imported Vehicle for Research Qualifies as 'Use' Under Section 74(2), Enabling 60% Duty Drawback Refund

DAIMLER CHRYSLER INDIA PVT. LTD. Versus UNION OF INDIA

DAIMLER CHRYSLER INDIA PVT. LTD. Versus UNION OF INDIA - 2004 (175) E.L.T. 72 (Bom.) 1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Court were:

• Whether the use of a fully built imported car during the course of study and research within India amounts to 'use' of the car after importation as contemplated under Section 74(2) of the Customs Act, 1962.
• Whether such use entitles the importer to duty drawback at the full rate of 98% of customs duty paid, or a reduced rate as prescribed for goods that have been 'used' prior to export.
• Whether the driving of the car within factory premises and on public roads for export purposes constitutes use within the meaning of Section 74(2).
• Whether the absence of registration under the Motor Vehicles Act affects the determination of 'use' of the vehicle.
• Whether the imported car was used for the purpose for which it was imported, and if not, whether that affects the entitlement to duty drawback.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Meaning and scope of 'use' under Section 74(2) of the Customs Act, 1962

Relevant legal framework and precedents: Section 74(2) provides that goods which have been 'used' after importation are eligible for duty drawback at rates fixed by the Central Government, considering factors such as duration of use and depreciation. Notification No. 19/65-Cus. prescribes scaled rates of drawback depending on the period goods remain out of customs control.

The term 'use' is not defined in the Act, requiring interpretation based on ordinary dictionary meanings and contextual application. The Shorter Oxford Dictionary defines 'use' as 'to make use of,' while Black's Law Dictionary defines it as 'to convert into one's service, to avail oneself of, employ.'

Precedents considered include:

• Millipore (India) Pvt. Ltd. v. Union of India, where the Karnataka High Court held that operation of machinery for demonstration or exhibition constitutes 'use' under Section 74(2).
• Director of Entry Tax v. Mainbrace & Mahindra, where the Supreme Court held that demonstration of machines, even free of charge, amounts to use for tax purposes.
• Petitioners relied on Anwarkhan Mahboob Co. v. State of Bombay and Kathiawar Industries Ltd. v. Jaffarabad Municipality to argue that use must be for the purpose for which goods were intended, but the Court found these cases factually distinguishable.

Court's interpretation and reasoning: The Court held that 'use' carries a wide meaning and includes employing the goods for the purpose for which they were imported, even if that purpose is research and development rather than commercial exploitation per se. The car was imported as a prototype/sample for study to develop indigenous components, and its operation within the factory and on roads constituted use in this context.

Key evidence and findings: The car was driven 232 km within the factory premises and from Pune to Mumbai for export purposes. The import was made under the Government's import policy allowing import of prototypes/samples by actual users for research and development without foreign exchange remittance.

Application of law to facts: Applying the broad dictionary meaning of 'use,' the Court found that the petitioners had indeed used the car for the purpose it was imported. The fact that it was driven for study and research, as well as for export logistics, established use under Section 74(2).

Treatment of competing arguments: The petitioners' argument that use must be commercial exploitation and that absence of registration under the Motor Vehicles Act meant no use was rejected. The Court held that use need not be commercial in the narrow sense and that absence of registration could not benefit the petitioners, especially where the vehicle was driven on public roads.

Conclusion: The Court concluded that the car was used after importation within the meaning of Section 74(2).

Issue 2: Entitlement to duty drawback at 98% or reduced rate

Relevant legal framework: Section 74(1) allows for duty drawback at 98% of customs duty paid if goods are exported without use, while Section 74(2) mandates reduced drawback rates for goods used after importation, as fixed by government notifications.

Court's reasoning: Since the Court held the car was used, the petitioners were not entitled to the full 98% drawback under Section 74(1). Instead, the reduced rates prescribed under Notification No. 19/65-Cus. applied. The Assistant Commissioner had granted 60% drawback based on the period the car remained out of customs control, which was consistent with the notification.

Key findings: The car was used for less than 18 months before export, entitling the petitioners to 60% drawback as per the notification.

Application of law to facts: The Court upheld the reduced drawback rate, confirming that the use of the car triggered Section 74(2) and the associated reduced rates.

Competing arguments: Petitioners argued that since the car was not commercially used and did not depreciate in value, full drawback was warranted. The Court rejected this, noting that use for research and export logistics still constituted use and that the policy and notification governed the rates.

Conclusion: The petitioners were entitled only to the reduced 60% drawback rate, not the full 98%.

Issue 3: Effect of absence of registration under Motor Vehicles Act on 'use'

Relevant legal framework: Section 39 of the Motor Vehicles Act requires registration of vehicles prior to use on public roads.

Court's reasoning: Petitioners contended that absence of registration meant the vehicle was not used on roads and therefore not 'used' under Section 74(2). The Court held that the vehicle was driven on public roads from Pune to Mumbai, which would have required registration. The failure to register was a breach of law but could not be used to claim non-use.

Key findings: The vehicle was driven on public roads without registration, which did not negate the fact of use.

Application of law to facts: The Court held that the petitioners could not take advantage of their own wrong (non-registration) to claim non-use.

Conclusion: Absence of registration did not negate the fact that the car was used after importation.

Issue 4: Whether the car was used for the purpose for which it was imported

Court's reasoning: The car was imported under a policy permitting import of prototypes/samples for study and research. The petitioners used the car precisely for that purpose - conducting study and research to develop indigenous components. Driving the car within factory premises and on roads for export purposes was consistent with the import purpose.

Competing arguments: Petitioners argued that the car was not used for the purpose for which it was imported, as it was not commercially exploited. The Court rejected this, emphasizing the broad import policy and the intended use for research and development.

Conclusion: The car was used for the purpose for which it was imported.

3. SIGNIFICANT HOLDINGS

The Court held:

'The word 'use' carries a very wide meaning. Applying the dictionary meaning, one has to conclude that the car was used after import for the purpose for which it was imported, namely study and research.'

'Once machinery is operated, even for a shorter time for demonstration or exhibition, it amounts to use and does not remain new machinery.'

'The vehicle was put to use after its importation and the respondent was justified in directing refund of duty drawback @ 60% in terms of Section 74(2) read with Notification No. 19/65-Cus., dated 6th February, 1965.'

'Absence of registration under the Motor Vehicles Act cannot be taken advantage of by the petitioners to claim non-use.'

Core principles established include:

• 'Use' under Section 74(2) includes employment of imported goods for purposes such as study, research, demonstration, or export logistics, not limited to commercial exploitation.
• Duty drawback rates under Section 74(2) and the relevant government notification apply whenever imported goods are used after importation, regardless of the nature or duration of use.
• Legal compliance failures (such as non-registration of vehicles) do not negate actual use for customs drawback purposes.

Final determinations:

• The imported car was 'used' within the meaning of Section 74(2) of the Customs Act.
• The petitioners were not entitled to duty drawback at the full 98% rate under Section 74(1), but only at the reduced rate of 60% as per the notification.
• The impugned order granting 60% drawback was upheld and the writ petition dismissed.