M/S KARNATAKA STATE SMALL INDUSTRIES DEVELOPMENT vs. THE ASSISTANT COMMISSIONER OF INCOME-TAX

1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 6TH DAY OF JANUARY 2021 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE NATARAJ RANGASWAMY C.S.T.A. NO.2 OF 2007 BETWEEN: THE COMMISSIONER OF CUSTOMS C.R. BUILDINGS, QUEEN'S ROAD BANGALORE-560001. .... APPELLANT (BY MR. K.V. ARAVIND, ADVOCATE) AND: M/S. MOTOROLA INDIA LIMITED NO.88-A, ELECTRONICS CITY HOSUR ROAD, BANGALORE PRESENTLY AT M/S. MOTOROLA INDIA PVT.LTD., 415/2, MEHRAULI GURGAON ROAD SECTOR 14, GURGAON-122001. ... RESPONDENT (BY MR. K.S. RAVISHANKAR, ADVOCATE) - - - THIS C.S.T.A. IS FILED UNDER SEC. 130 OF THE CUSTOMS ACT, 1962 ARISING OUT OF ORDER DATED 12-05-2006 & 30-04- 2002 PASSED IN FINAL ORDER NO.881/2006 & ORDER-IN- ORIGINAL NO.25/2002 COMMR/CUS ADJN PRAYING TO (i) FORMULATE THE SUBSTANTIAL QUESTION OF LAW STATED THEREIN. (ii) SET ASIDE THE FINAL ORDER NO.881/2006 DATED 12- 05-2006 PASSED BY THE CESTAT, SOUTH ZONAL BENCH AT BANGALORE VIDE ANNEXURE-B.

2 (iii) RESTORE THE ORDER-IN-ORIGINAL NO.25/2002 CUMMR/CUS ADJN DATED 30-04-2002 PASSED BY THE COMMISSIONER OF CUSTOMS, BANGALORE REGION, BANGALORE, VIDE ANNEXURE-A, IN THE INTEREST OF JUSTICE AND EQUITY. THIS C.S.T.A. COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 130 of the Customs Act, 1962 (hereinafter referred to as the Act for short) has been filed against the order dated 12.05.2006 passed by Customs, Excise and Service Tax Appellate Tribunal, Bangalore (hereinafter referred to as 'the tribunal' for short). The appeal was admitted by a bench of this court vide order dated 20.06.2007 on the following substantial questions of law: "1. Whether writing off the imported duty-free materials from the books of accounts of the importer is permissible in law and whether the same amounts to "disposed of" within the meaning of Customs Notification No.30/97-Cus dated 01.04.1997 under which the goods/materials are imported?

4 2. The factual background, in which the aforesaid questions of law arise for consideration in this appeal needs mention. The respondent is a leading manufacturer of pagers. The respondent imported components for manufacture of pagers under the Duty Exemption Entitlement Certificate scheme (hereinafter referred to as 'the scheme' for short) in terms of Notification No.30/97-Cus dated 01.04.1997 read with para 7.4 of EXIM Policy 1997-2002. The Licencing Authoirty had permitted the respondent to import quantities to the extent of 2% in excess of their actual requirement in respect of 13 out of 16 types of components towards wastage etc. during the process of manufacture of pagers. The respondent fulfilled the export obligation, however, it was not able to utilize some of the components imported under the scheme and closed down its messaging products division before April 2001. Due to the closure, some of the imported components were rendered obsolete and therefore, they

5 were written off in books during the financial year ending 31.03.2001. 3. On receipt of specific intelligence input and on an enquiry being made, a summon dated 04.05.2001 was issued to the respondent to submit list of unutilized items which were imported under Customs Notification No.30/1997-Cus dated 01.04.1997. The respondent on 08.05.2001 submitted a list of unutilized items, which were imported under the Duty Exemption Entitlement Certificate scheme. The respondent on 23.05.2001, submitted another list of all unutilized items. The Directorate of Revenue Intelligence vide communication dated 30.05.2001 sought for information pertaining to complete stock list of unutilized components after due certification by the auditors of the respondent or an independent Chartered Accountant and to mention the account under which the provision for writing off has been made. The respondent by communication dated 26.07.2001 submitted a complete list of unutilized items

6 pertaining to imports made under the scheme along with certificate of the auditor. Thereafter a show cause notice was issued to the respondent, requiring it to show cause as to why customs duty to the tune of Rs.96,17,498/- should not be demanded from it in terms of Notification No.30/1997-Cus dated 01.04.1997 as well as to show cause as to why duty free imported raw material be not confiscated and interest and penalty be not recovered from respondent. The Commissioner of Customs by an order dated 30.04.2002 held that the respondent is liable to pay duty to the extent of Rs.97,17,498/- as well as interest at the rate of 24% on the duty. The impugned goods were also confiscated under Section 111(o) of the Act and a penalty of Rs.20,00,000/- was imposed on the respondent under Section 112(a) of the Act. Being aggrieved, the respondent filed an appeal before the tribunal. The tribunal by an order dated 12.05.2006 inter alia held that the respondent had fulfilled its export obligation

7 and it was not obligatory on the part of the respondent to account for the wastage permitted. Accordingly, the appeal preferred by the respondent was allowed. In the aforesaid factual background, the revenue has filed this appeal. 4. Learned counsel for the revenue while inviting the attention of this court to clause (vii) of Notification No.30/1997-Cus dated 01.04.1997 submitted that as per the aforesaid clause, exempt materials shall not be disposed of or utilized in any manner except for utilization in discharge of export obligation or for replenishment of such materials and the materials so replenished shall not be sold or transferred to any other person. However, the respondent has written off duty free imported material in the books of accounts which is also a manner of disposal and therefore, the respondent had violated clause (vii) of the Notification. However, the aforesaid aspect of the matter has not been appreciated by the tribunal. It is further

8 submitted that exemption Notification has to be interpreted strictly and the burden of proving its applicability is on the assessee. However, the tribunal has also failed to take into account the aforesaid well settled legal principle. In support of his submissions, learned counsel for the revenue has placed reliance on constitution bench decision of the Supreme Court in 'COMMISSIONER OF CUSTOMS (IMPORT), MUMBAI VS. DILIP KUMAR & COMPANY', (2018) 95 TAXMANN.COM 327 (SC). 5. On the other hand, learned Senior counsel for the assessee while inviting the attention of this court to the order passed by the adjudicating authority as well as the tribunal submitted that concurrent findings of fact have been recorded that the respondent has fulfilled its export obligation. Learned Senior counsel has also invited our attention to para 6 of the order passed by the tribunal and has submitted that the tribunal has also recorded the finding that all the materials imported were

9 put to use and the respondent was allowed to import 2% in excess of their actual requirement to provide for wastage and technical progress and development and the fact that new products / innovations or type of components may supersede earlier products cannot be overlooked. It is also submitted that no option was given to the respondent before confiscation of the duty free imported material. In support of his submissions, learned Senior counsel for the assessee has placed reliance on decisions in 'CC VS. MOTOROLA INDIA LTD', 2019 (368) ELT 3 (SC), 'GAGANDEEP SINGH ANAND VS. CC (IMPORT)', 2019 (367) ELT 212 (BOM),'SANKAR SHASTYABDAPOORTHI MEMORIAL HOSPITAL VS. UOI', 2017 (345) ELT 334 (KER), 'FORTIS HOSPITAL LTD. VS. CC, IMPORT', 2015 (318) ELT 551 (SC) 'CC & CE VS. LEKHRAJ JESSUMAL & SONS', 1996 (82) ELT 162 (SC). 6. We have considered the submissions made by learned counsel for the parties and have perused the

10 record. Before proceeding further, we deem it appropriate to refer to clause (vii) of Notification No.30/1997-Cus dated 01.04.1997, which reads as under: (vii) exempt materials shall not be disposed of or utilized in any manner except for utilization in discharge of export obligation or for replenishment of such materials and the materials so replenished shall not be sold or transferred to any other person. 7. The tribunal on the basis of advance licences issued to the respondent and the standard input output norms has recorded a finding that the respondent was allowed to import 2% in excess to provide for the wastage. It is also pertinent to mention here that since, the respondent was allowed to import 2% in excess of their actual requirement, it is the case of the respondent that some of the components remained unutilized due to closure of messaging products division as the components were rendered obsolete. Admittedly, the

11 respondent has fulfilled the entire export obligation and has realized the foreign exchange and has neither diverted the import material nor has sold it and has used all the imported materials. It is pertinent to mention here that the provisions of the Income Tax Act, 1961, permit the respondent to write off the unused assets. Therefore, clause (vii) of the Notification has to be read in the context of the legal provisions and cannot be read in isolation. The word 'any manner' therefore, cannot include within its ambit written off duty free imported material in the books specially when the same was in the custody of the respondent itself as writing off of the same is permissible in law. Therefore, the contention of the revenue that provision or clause (vii) of the Notification. Was violated does not deserve acceptance. In view of preceding analysis, the substantial questions of law involved in this appeal are answered against the revenue and in favour of the assessee. We

12 find no merit in this appeal, the same fails and is hereby dismissed. Sd/- JUDGE Sd/- JUDGE SS