CESTAT Quashes Customs Duty Demand on Re-Imported Rejected Diesel Generator Sets Citing Lack of Suppression [Read Order]

Sterling Generators Pvt Ltd, the appellant, is a 100% Export Oriented Unit (EOU) manufacturing diesel generator (DG) sets. They supplied five DG sets to SEZ Biotech Services Pvt Ltd, an SEZ unit, in March 2008, out of which three DG sets were rejected by the SEZ buyer.

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The SEZ unit returned these three DG sets in November 2009, and Sterling Generators re-imported them in December 2009 under Notification No. 52/2003-Cus, claiming exemption from customs duty by filing the Bill of Entry with the SEZ Authorised Officer and enclosing the supplier’s invoice indicating rejection.

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During a later CERA audit, the department objected, claiming that the re-import of rejected DG sets was done beyond the permissible period of one year under condition no. 15 of Notification No. 52/2003-Cus, and hence, the exemption was not available. A show cause notice was issued in January 2014, demanding Rs. 1.03 crore as customs duty with interest and proposing penalties under Section 112 and Section 114A of the Customs Act, 1962, along with confiscation of the re-imported DG sets.

The appellant’s counsel argued that the delay in re-importation beyond one year was procedural, not substantive, relying on CBEC Circular No. 60/99-Cus and the Supreme Court ruling in KAR Mobiles Ltd, which held that time limits under such notifications are procedural.

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They submitted that the re-imported DG sets were re-engineered and supplied as per customer specifications, falling under raw material usage, which is exempt under Serial No. 7 of the notification without a time limit. They further argued that all details were declared in ER-2 returns filed in February 2010, and the department had all records, negating suppression or intent to evade, making the invocation of the extended period invalid.

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The revenue counsel argued that the DG sets were re-imported after the one-year time limit prescribed under condition no. 15 of the notification, making the exemption inapplicable, and that the customs duty with penalties was correctly demanded under the law.

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The two-member bench comprising Dr. Ajaya Krishna Vishvesha (Judicial Member) and S.V. Singh (Technical Member) observed that the appellant had disclosed all facts at the time of re-import and in their ER-2 returns, and the SEZ Authorised Officer had cleared the goods duty-free after examining the documents. The tribunal further observed that the department issued the show cause notice in 2014, more than four years after re-import, based on CERA audit objections, and there was no suppression of facts by the appellant to justify the extended period invocation.

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The tribunal explained that since the extended period could not be invoked, the customs duty demand and penalties under Sections 112 and 114A of the Customs Act were unsustainable. The tribunal also observed that procedural delays should not result in the denial of substantive benefits where goods are returned and re-engineered for customer-specific requirements within the EOU operational framework.

The tribunal set aside the demand of customs duty, interest, and penalties on Sterling Generators Pvt Ltd and its authorised signatory, Nagendra Singh, and allowed the appeals with consequential relief.

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