Customs Duty Exemption Denied for Misrepresentation and Only 5.18% Value Addition: Karnataka HC Sets Aside CEGAT Order [Read Order]

The Karnataka High Court has set aside the order of the Customs, Excise and Gold Appellate Tribunal (CEGAT), holding that the benefit of duty exemption could not be granted where the value addition on exported ventilator systems was only 5.18% and the licence conditions under the Export-Import Policy were misrepresented.

The petition was filed by the Principal Commissioner of Customs, Airpost and Air Cargo Commissionerate, Bengaluru, against M/S. Lucky Exports and others, challenging the Final Order dated passed by the Customs, Excise and Gold Appellate Tribunal (CEGAT).

The appellant authority contended that the respondent partnership firm, engaged in export of ventilator systems to Russia, obtained advance licences from the Directorate General of Foreign Trade (DGFT) on the representation that imported components would be used for manufacture in India before export.

The Directorate of Revenue Intelligence initiated investigation when irregularities surfaced during the import of the second consignment. It was alleged that complete ventilator units were imported in semi-knocked-down condition and that the claimed assembly and manufacturing processes undertaken in India were merely superficial.

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After adjudication of the show-cause notice, the Commissioner of Customs ordered confiscation of goods under Section 111 of the Customs Act, 1962, demanded customs duty under Section 28 of the Customs Act, 1962 along with interest, and imposed penalties under Section 114 and Section 114A of the Customs Act, 1962, after finding violation of licence conditions and false declaration of value addition.

Appearing for the customs department, Akash B. Shetty argued that the Tribunal erred in ignoring the mandatory value addition requirement of 33% for securing exemption on exports against rupee payment under the Export-Import Policy, 1997-2002.

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It was submitted that the Directorate General of Revenue Intelligence found no real manufacture or value enhancement and that the percentage of value addition was merely 5.18%.

Representing the respondents, counsel Lakshmikumaran and Sriharan argued that assembly, calibration, testing and integration processes were conducted in India and constituted manufacture within the definition provided under Paragraph 3.31 of the Export-Import Policy, 1997-2002.

The respondents contended that exports took place only after subjecting the imported components to technical processes and quality checks and that customs officers supervised the exports.

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The Bench of Justice D. K. Singh and Justice Venkatesh Naik T held that exemption under the relevant notification could only be availed when all conditions forming the basis of the exemption stood fully satisfied. The Court observed that the minimum 33% value addition mandated under the Export-Import Policy applied to exports against rupee payment and must be reflected in intrinsic enhancement of the exported products.

The evidence recorded by the Commissioner demonstrated that the increase in export value was not due to processing or manufacture carried out in India, but merely due to exchange rate conversion under the rupee-ruble arrangement. The Court further held that strict compliance with licence conditions issued by the DGFT was necessary and that the respondents had misrepresented material particulars to secure duty-free import benefits.

The Court found that the Tribunal had ignored the findings on misrepresentation, absence of intrinsic value addition and violation of licence conditions, and had mechanically applied the Titan Medical Systems (2002) ruling without considering the factual distinction.

On these grounds, the petition was allowed and the Final Order passed by the Tribunal was set aside, thereby restoring the duty demand, confiscation and penalties imposed in the Order-in-Original passed by the Commissioner of Customs, Bengaluru.

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