2025 (11) TMI 1286 - AT - Customs

Customs must await DGFT decision on advance authorisation exemption under Notification 18/2015-Cus; premature demand order remanded

CESTAT held that while Customs authorities may investigate and issue show cause notices regarding eligibility of exemption under N/N. 18/2015-Cus and ... Jurisdiction - DGFT is the proper authority to decide the issues related to eligibility of advance authorizations or not - Exemption on condition that the goods would be used in the manufacture of export goods only as per N/N. 18/2015-Cus dated 01-04-2015, as amended - Fulfilment of export obligation of advance authorization by manufacturing and exporting finished goods as permissible by the Policy - HELD THAT:- The Customs authorities can initiate investigation and issue notice on such issues when they have doubt regarding the eligibility of the benefits availed by the appellant. But, a final decision can be taken only after DGFT authorities have taken a final decision on the matter. The impugned order is premature at this stage and hence we set aside the same. The Show cause notice should be adjudicated after the DGFT authorities have taken a decision by adjudicating the notice issued by them to the appellant on the same issue. Thus, the issue is remanded back to the adjudicating authority to decide the issue after the decision of the DGFT authorities on the said issue. Appeal disposed off by way of remand. ISSUES PRESENTED AND CONSIDERED 1. Whether the Customs adjudicating authority can finally decide demand, penalty and redemption fine relating to alleged misuse of Advance Authorisations where DGFT has already issued show cause notices and adjudication before DGFT is pending. 2. Whether imported materials exempted under an Advance Authorisation must be physically incorporated in exported goods prior to being counted for Export Obligation Discharge, and whether exports made out of indigenous materials prior to importation can discharge export obligations under the Advance Authorisation scheme. 3. Scope of Customs authorities' powers vis-à-vis DGFT in matters concerning eligibility and misuse of benefits under the Foreign Trade Policy/Advance Authorisation scheme, including the effect of DGFT decisions on Customs demands. ISSUE-WISE DETAILED ANALYSIS Issue 1: Competence to adjudicate where DGFT proceedings are pending Legal framework: The Foreign Trade (Development & Regulation) Act, 1992 (FTDR Act) and the Foreign Trade Policy/HBP govern issuance, cancellation and adjudication of Advance Authorisations; Customs Act, 1962 empowers Customs to assess duty, impose fines and penalties where exemption conditions are breached. DGFT has power under FTDR Act to cancel authorisations and impose fiscal penalties; Customs can assess duty if exemption misused. Precedent Treatment: Decisions cited by the appellant establish that DGFT is the competent authority to determine eligibility under trade/licence schemes and that Customs should act cautiously where DGFT proceedings are pending - authorities have remanded or stayed Customs action pending DGFT decision (principles in prior tribunal decisions relied upon by appellant). Interpretation and reasoning: The Tribunal accepts that Customs may investigate and issue show cause notices when there is doubt about entitlement to duty-free import benefits, but a final adjudication on entitlement and related fiscal consequences should follow DGFT's determination where DGFT proceedings on the same issue are pending. The Court reasons that dual final decisions on the same subject-matter by different fora would be prejudicial and misconceived; DGFT's adjudication on advance authorisation eligibility is central to the validity of Customs' claim of misuse. Ratio vs. Obiter: Ratio - Where DGFT has initiated and pending adjudication on alleged misuse of Advance Authorisations, a Customs adjudication confirming duty and penalties on the same issue is premature and should be deferred until DGFT concludes its proceedings. Obiter - Customs retains the right to investigate and issue notices pending DGFT decision. Conclusion: The impugned Customs adjudication was premature and is set aside; matter remanded to adjudicating authority to proceed only after DGFT has adjudicated its show cause notices relating to the same Advance Authorisations. Issue 2: Requirement of physical incorporation and timing of exports for discharge of Export Obligation Legal framework: Provisions of the Foreign Trade Policy and Handbook of Procedures (e.g., paras invoked regarding pre-export imports, physical incorporation, and disposal after fulfilment) set conditions under which duty-free imports under Advance Authorisation may be used and when export obligations are discharged. Customs statute enforces duty recovery if conditions are violated. Precedent Treatment: The appellant relied on authorities indicating that exports made in anticipation of an Advance Authorisation can be accepted and that Customs' role is largely to verify exporter's declarations and quantities, while DGFT determines entitlement and credits; tribunal decisions have upheld deference to DGFT on licence-related matters. Interpretation and reasoning: The adjudicating authority had held that imported Alloy Steel Wire Rods were not used in manufacture of exported goods and that exports made before imports (and allegedly using indigenous inputs) could not discharge obligations. The Tribunal did not reach a conclusive factual determination on whether physical incorporation or timing requirements were breached; instead it found that such factual and policy determinations fall within the scope of DGFT's pending show cause process and thus cannot be finally resolved by Customs before DGFT's adjudication. The Tribunal notes policy provisions allowing disposal of finished goods once export obligation is fulfilled and acknowledges competing interpretations about whether exported goods must match imported tariff headings if essential transformation has occurred. Ratio vs. Obiter: Ratio - Determination whether imported materials were physically incorporated, or exports made prior to importation discharge obligations, should await DGFT's final decision where DGFT proceedings on misuse are pending. Obiter - The FTP/HBP permit disposal of finished goods after fulfillment and do not rigidly require identical tariff headings where substantial transformation occurs; factual assessment required. Conclusion: No final finding on physical incorporation or timing of exports is made; adjudication on duty/penalty in relation to these factual-policy issues must follow DGFT's adjudication, hence remand is appropriate. Issue 3: Division of functions - Customs investigation vs DGFT adjudication and effect of DGFT determinations on Customs actions Legal framework: Customs may detect, investigate and demand duty where exemption conditions appear breached; DGFT administers trade licensing schemes and determines cancellation/penalties under FTDR Act and HBP. Coordination is required to avoid conflicting final orders on same subject. Precedent Treatment: Decisions relied upon emphasise that Customs' primary role is verification and that DGFT's adjudicatory decisions on licence eligibility/credit are determinative; Customs may act on findings of DGFT but should not pre-empt DGFT's decision when it is pending. Interpretation and reasoning: The Tribunal affirms that Customs has power to initiate inquiries and issue demands, but where DGFT has initiated adjudication on misuse of an Advance Authorisation, Customs should defer final adjudication. The Tribunal reasons that DGFT's eventual decision will bear directly on the legality of Customs' demand (duty/penalty/redemption fine) and that proceeding otherwise risks inconsistent outcomes and prejudice to the licence-holder. Ratio vs. Obiter: Ratio - Customs' final adjudication on entitlement to Advance Authorisation benefits should await DGFT's adjudication when DGFT proceedings on the same facts and issues are pending. Obiter - Customs may report findings to DGFT and initiate investigations without deciding final entitlement. Conclusion: The Tribunal directs remand for the Customs adjudicating authority to adjudicate the show cause notice only after DGFT concludes its proceedings; Customs may re-open adjudication thereafter in accordance with DGFT's findings. Disposition and operative conclusion The impugned Customs adjudication confirming demand, redemption fine and penalty is set aside as premature; the matter is remanded to the adjudicating authority to proceed after DGFT has adjudicated its pending show cause notices on the same Advance Authorisation issues. The appeal is disposed by remand.