2025 (11) TMI 1730 - AT - Customs

Appeal allowed restoring MEIS benefits; customs cannot reclassify zeolite from 6815 9990 to 2530 9099 without basis (HS)

CESTAT Mumbai allowed the exporter's appeal, setting aside denial of MEIS benefits and confiscation of goods. The Tribunal held that customs authorities ... Denial of benefit of merchandise exports from India scheme (MEIS) - confiscation of goods - mis-declaration of goods - declaration of goods as ‘zeolite’ was not alleged to be inappropriate in the SCN - overvaluation of export goods - HELD THAT:- The code upon which the entire case has been set is a stranger to the process of assessment under Customs Act, 1962 and to affirm that description corresponding to tariff item 2530 9099 of First Schedule to Customs Tariff Act, 1975 as more appropriate to the export goods than that corresponding to code 6815 9990 is not only comparison of incomparable but lacking authority of law inasmuch as the General Interpretative Rules appended to Customs Tariff Act, 1975, which guide the emplacement of articles against respective headings and subheadings of tariff items, is specific not only to each Schedule exclusively but also restricted to such enumerations as are there in the Second Schedule to Customs Act, 1962. Consequently, as far as export goods is concerned there is no scope for applying either the Rules or the enumerations in the Schedules for disallowance of eligibility arising from consequence of goods exported that are not established as not conforming to description claimed in the shipping bills. That the goods are ‘zeolite’ is not in dispute and the only issue that remains in contention is the claim of exporter that ‘zeolite’ has been subject to further processing to form articles. The show cause notice has not taken into account the submissions made by the appellant about the manner in which the export goods differ from extracted natural ‘zeolite’ as well as the process of trimming which gives desired shape and designed as ‘collectors’ item ready to be deployed for retail sale at the time of export. In the absence of such appreciation, the attempt by customs authorities to reject the declared ITC(HS) code is incorrect and without jurisdiction. Appeal allowed. 1. ISSUES PRESENTED AND CONSIDERED 1.1 Whether customs authorities had legal authority under the Customs Act, 1962 to confiscate the export goods and impose redemption fine and penalties when the exported goods attracted no export duty and were not prohibited goods. 1.2 Whether customs authorities could revoke or deny benefits under the Merchandise Exports from India Scheme (MEIS) by questioning classification, value, or eligibility of exports, in the absence of any allegation or proof of utilization of scrips for import duty benefits. 1.3 Whether re-determination of value of export goods under the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 was permissible without valid rejection of declared value under rule 8 and when such valuation had no bearing on export duty assessment. 1.4 Whether customs authorities were competent to alter or reject the declared ITC(HS)/RITC code for the exported goods, in the context of the structure of the Customs Tariff Act, 1975 and its Second Schedule for export goods, when there was no dispute that the goods were 'zeolite.' 1.5 Whether the nature and level of processing of 'zeolite' exported as shaped and finished articles justified rejection of the declared classification and substitution by the authorities, in the absence of proper consideration of the exporter's submissions on processing. 2. ISSUE-WISE DETAILED ANALYSIS 2.1 Authority to confiscate export goods and impose fine/penalties where no export duty or prohibition applies Legal framework 2.1.1 The Court examined section 17 (assessment), section 51 (clearance of goods for exportation), and section 12 (charge of duty) of the Customs Act, 1962, together with the Second Schedule to the Customs Tariff Act, 1975, which alone governs export duties. 2.1.2 Section 51 permits clearance for exportation where the proper officer is satisfied that the goods are not 'prohibited goods' and that any duty and charges assessed have been paid. Section 12 read with section 2 of the Customs Tariff Act, 1975 links the 'rate of duty' to the Schedules of the Tariff Act, with only items enumerated in the Second Schedule attracting export duty. Interpretation and reasoning 2.1.3 The Court found that the impugned show cause notice and order were triggered by investigation of one 'live' shipping bill and extended to past and subsequent shipments, all concerning exports of 'zeolite.' 2.1.4 On perusal of the Customs Tariff, the Court noted that only six items from chapter 20 are enumerated in the Second Schedule, with no entry for heading 2530 and no entry from chapter 68. Consequently, the exported goods were not covered by any export tariff item carrying a rate of duty. 2.1.5 In the absence of any applicable export duty rate, determination of 'value' under section 14 and any assessment under section 17 for export duty purposes were held to be rendered immaterial. 2.1.6 The Court held that section 51 conditions for withholding export clearance are confined to non-payment of applicable duty or the goods being 'prohibited.' There was no allegation of any prohibition on export of 'zeolite' in any form, whether under a notification issued under section 12 or under any other law. 2.1.7 The Court concluded that, as there was neither export duty liability nor prohibition, the foundation for invoking confiscation under section 113(i) and for imposing redemption fine under section 125 or penalties under section 114 of the Customs Act, 1962, was absent. Conclusions 2.1.8 Confiscation of the export goods, and consequential redemption fine and penalties, were held to be without authority of law and unsustainable. 2.2 Power of customs authorities to revoke or deny MEIS benefits and to act against MEIS scrips Legal framework 2.2.1 The Court considered the scheme of the Foreign Trade Policy (FTP) relating to MEIS and the role of the Directorate General of Foreign Trade (DGFT), vis-à-vis the Customs Act, 1962 and notifications under section 25 governing use of scrips to pay import duty. Interpretation and reasoning 2.2.2 The Court recorded that MEIS scrips, totalling Rs. 71,54,100 (already issued and utilized) and a further potential entitlement of Rs. 2,57,166, were sought to be affected through the impugned order on the basis of alleged mis-declaration/overvaluation of export goods and ineligibility under the scheme. 2.2.3 The Court held that eligibility and issuance of MEIS scrips is determined exclusively by DGFT under the FTP. The role of customs authorities arises only at the stage of clearance of imported goods against such scrips, pursuant to relevant exemption notifications under section 25 of the Customs Act, 1962. 2.2.4 The Court emphasised that the show cause notice contained no allegation that any imports had been made using the MEIS scrips in question, either by the exporter or by transferees, nor any computation of duty allegedly foregone on identifiable imports. 2.2.5 In the absence of any allegation or evidence of utilization of the scrips to discharge import duty on specific goods, the Court held that there was no live issue within the jurisdiction of customs authorities justifying interference with the scrips. 2.2.6 The Court further observed that no case was made that valuation under the Customs Valuation (Determination of Value of Export Goods) Rules, 2007 was relevant for determining MEIS eligibility under the FTP or under any exemption notification relating to use of scrips. 2.2.7 It was also noted that the adjudicating authority itself had held that rejection of declared value under rule 8 was a pre-condition for re-determination and had dropped proposals for such re-determination. Conclusions 2.2.8 Intervention by customs authorities in rescinding or withholding MEIS scrips, in the circumstances of this case and in the absence of demonstrated utilization for imports, was held to be beyond jurisdiction and unsustainable. 2.3 Validity of re-determination of export value under the Customs Valuation Rules, 2007 Legal framework 2.3.1 The Court referred to the Customs Valuation (Determination of Value of Export Goods) Rules, 2007, particularly rule 8 concerning rejection of declared value and re-determination. Interpretation and reasoning 2.3.2 The show cause notice and Revenue's appeal proceeded on the premise that export goods were overvalued to obtain higher MEIS benefits, and that declared value should be rejected and redetermined by reference to values declared by other exporters. 2.3.3 The Court noted the finding in the impugned order that rejection of the declared value under rule 8 is a pre-requisite for redetermination under the Valuation Rules. As the adjudicating authority had found no sufficient basis to reject the declared value and thus dropped proposals for redetermination, that determination stood against Revenue's contention. 2.3.4 The Court further held that, since the exported goods did not attract any export duty under the Second Schedule, valuation under section 14 and under the Valuation Rules was rendered inconsequential for assessment under section 17. 2.3.5 In addition, no nexus was demonstrated between re-determined export value and any actual customs-duty impact, whether in terms of export duty or quantified revenue loss through MEIS-linked imports. Conclusions 2.3.6 In the absence of lawful rejection of declared value under rule 8 and in view of the lack of any consequential duty liability, proposals for re-determination of export value were held to be without legal basis and rightly dropped. 2.4 Competence of customs authorities to alter or reject declared ITC(HS)/RITC classification for export goods Legal framework 2.4.1 The Court examined the structure of the Customs Tariff Act, 1975, the First and Second Schedules, and the General Interpretative Rules, in relation to classification of export goods. It particularly considered the relevance of tariff items 2530 9099 and 6815 9990 and their relationship to the Second Schedule. Interpretation and reasoning 2.4.2 The entire case of the department for denial of MEIS and for reclassification was based on the assertion that 'zeolite' should be classified under tariff item 2530 9099 (as natural mineral) instead of the declared 6815 9990 (articles of stone). 2.4.3 The Court highlighted that, for export goods, only those tariff items actually enumerated in the Second Schedule are relevant for the levy of export duty. While the chapter headings and tariff items in the Second Schedule mirror those in the First Schedule, they are limited to specific entries which bear duty. 2.4.4 The Court stated that the General Interpretative Rules appended to the Customs Tariff Act, 1975 guide classification within each Schedule separately and apply only to the enumerated headings/subheadings within that particular Schedule. 2.4.5 It found that the code (and corresponding description) on which the department's case rested was 'a stranger' to the process of assessment of export goods under the Customs Act, 1962, because neither heading 2530 nor chapter 68 entries figured in the Second Schedule for export duty purposes. 2.4.6 Consequently, treating tariff item 2530 9099 of the First Schedule as 'more appropriate' than 6815 9990 for exported goods, for purposes of disallowing MEIS or taking customs action, was held to lack statutory backing and to amount to comparing 'incomparable' entries outside the operative Second Schedule framework for exports. 2.4.7 The Court held that, as far as export goods are concerned, there is no scope to use the General Interpretative Rules or tariff enumerations in the Schedules as an independent basis to disallow benefits or deny eligibility unless it is first established that the exported goods do not conform to the description declared in the shipping bills. Conclusions 2.4.8 Customs authorities lacked jurisdiction, on the facts and statutory scheme, to displace the declared ITC(HS)/RITC code for the export goods in the manner done, for purposes of denying MEIS or initiating confiscation/valuation proceedings. 2.5 Nature of 'zeolite' exports and adequacy of consideration of processing and product description Interpretation and reasoning 2.5.1 It was common ground that the exported goods were 'zeolite.' The dispute concerned whether they were in crude natural form (as minerals) or had been processed into finished 'articles' meriting the declared classification. 2.5.2 The exporter asserted that the zeolite was extracted stones that had undergone multiple processing steps: cutting, trimming, removal of excrescences, stabilizing, application of acids and adhesives, and shaping and finishing as aesthetically appealing 'collectors' items' ready for retail sale, thereby losing the character of crude natural stones. 2.5.3 The Court noted that the show cause notice had not addressed or analysed these submissions on the degree of processing and how the processed goods differed from extracted natural zeolite. 2.5.4 The Court observed that each package comprised uniquely shaped articles and that customs authorities had attempted to reject the declared ITC(HS) code without proper appreciation of these factual aspects of processing and product form. 2.5.5 It held that, in the absence of such appreciation and without cogent reasoning addressing the processing claimed, the attempt by customs authorities to reject the declared code and to substitute an alternative classification was incorrect and beyond jurisdiction. Conclusions 2.5.6 The Court accepted that the department had not validly established that the goods conformed only to crude 'natural' zeolite and found no legal basis to displace the exporter's declared description and code. The adverse determination against the exporter based on reclassification was therefore set aside. 2.6 Overall disposition of appeals 2.6.1 In light of the findings that confiscation and connected penalties lacked statutory authority, that customs had no jurisdiction to interfere with MEIS scrips in the absence of demonstrated utilization, that re-determination of value was unwarranted, and that rejection of the declared code was without jurisdiction, the exporter's appeal was allowed. 2.6.2 For the same reasons, the Revenue's appeal challenging the dropping of valuation proposals and seeking to sustain reclassification and confiscation was dismissed.