Conditional customs exemption fails when imported goods are diverted from the registered factory to other manufacturing units.

A conditional customs exemption was unavailable where imported bulk drugs were not used in the importer's registered factory and were instead diverted to other manufacturing units on a loan licence basis. The procedure under the 1996 Rules was treated as requiring end-use in the registered factory, and breach of that condition exposed the goods to duty, confiscation and penalty. The customs authorities' power to issue notice and proceed under the Customs Act was not excluded by the Rules, and action for duty demand and penalty remained available on breach of import conditions. On the facts, confiscation and redemption fine were set aside and the penalty was reduced.

---

---

Issues: (i) Whether the benefit of Notification No. 23/98-Cus. was available when the imported bulk drugs were not used in the importer's own factory but were sent to other units for manufacture on loan licence basis; (ii) whether the Customs authorities at the port of importation had jurisdiction to issue the show cause notice and impose duty, penalty and confiscation, notwithstanding the procedure under the 1996 Rules; (iii) whether confiscation and the full penalty were sustainable in the facts of the case.

Issue (i): Whether the benefit of Notification No. 23/98-Cus. was available when the imported bulk drugs were not used in the importer's own factory but were sent to other units for manufacture on loan licence basis.

Analysis: The exemption was conditional upon following the procedure under the 1996 Rules and upon use of the imported goods in the manufacturer's factory. The registration and bond requirements under the Rules contemplated end-use in the registered factory. The goods were admittedly sent to other manufacturers, and the importer had undertaken to use them at its own factory premises. The arrangement of manufacture through other units did not satisfy the exemption condition.

Conclusion: The exemption was not available, and the importer was liable to duty; the goods were also liable to confiscation and the importer to penalty.

Issue (ii): Whether the Customs authorities at the port of importation had jurisdiction to issue the show cause notice and impose duty, penalty and confiscation, notwithstanding the procedure under the 1996 Rules.

Analysis: Rule 8 of the 1996 Rules empowered the Central Excise authority to recover differential duty where imported goods were not used for the intended purpose, but that did not exclude the Customs authorities from acting under the Customs Act. The notice was issued for recovery of duty under Section 28 and for penalty under Section 112(a) on the basis of misstatement at the time of import. The Customs Act provisions for demand, confiscation and penalty remained available where the exemption conditions were breached.

Conclusion: The show cause notice and the Customs authorities' action were within jurisdiction.

Issue (iii): Whether confiscation and the full penalty were sustainable in the facts of the case.

Analysis: Although non-fulfilment of the exemption condition attracted confiscation and penalty in principle, the order of confiscation could not stand because the notice did not specifically call upon the importer to show cause against confiscation and the goods were not available for confiscation. In view of the circumstances, the penalty was considered excessive and warranted reduction.

Conclusion: Confiscation and redemption fine were set aside, and the penalty was reduced to Rs. 10,000/-.

Final Conclusion: The exemption claim failed on merits for non-compliance with the end-use condition, the Customs authorities' jurisdiction was upheld, but the confiscation was set aside and the penalty substantially reduced.

Ratio Decidendi: Where exemption under a conditional customs notification is expressly linked to use of imported goods in the importer's registered factory, diversion of the goods to other manufacturing units defeats the exemption; however, that does not exclude the Customs authorities' power under the Customs Act to demand duty and impose penalty for breach of import conditions.

---