Full Judgment
For the scheme to apply, it is not necessary that the inputs should have been imported.
3. The dispute has arisen in this case because for each of the products exported by the appellant, the Handbook provides more than one set of inputs. The major product exported by the appellant is amoxycillin trihydrate and its formulation and we shall take it as an example. In entry 41, against the export amoxycillin trihydrate, 6 Amino Penicillanic Acid (6 APA for short) and 9 other products are specified as inputs, with their quantities being mentioned. Against the export of amoxycillin trihydrate (Penicillin G route), in entry 42, the major import items are primary form of Penicillin G Potassium First Crystals with 11 other inputs. Therefore, if the appellant's export is considered to fall under serial 41, the credit available will be worked out on the basis of the duty payable on 6 APA and the 9 other items specified in that number. If it is held to be a product falling in serial 42, the credit would be worked put on the duty payable on Penicillin G Potassium First Crystals and 11 other items specified in that serial number. In the order impugned in this appeal, the Commissioner has held that amoxycillin trihydrate exported by the appellant falls under serial 42, and permitted credit equal to the duty paid on Penicillin G and the remaining inputs. This poses a problem to the appellant because Penicillin G was, and still is, exempted from duty. The credit available with regard to this item would be therefore nil. This dispute arises in case of each commodity exported. Each of them, we are told, is in the general category of penicillins and referred to as semi synthetic penicillin and one of the two items of inputs applicable to each of them includes Penicillin G as a major input item.
4. It is necessary at this point to consider the manufacturing process of the goods in question. As we have noted, each of the drugs and the formulations made out of these drugs falls within the group known as penicillins. Martindale's Extra Pharmacopoeia published by Royal Pharmaceutical Society, 31st Edition 1996 says that the term penicillin is now used generically for the entire group of natural and semi-synthetic penicillins. "They all have the same ring structure and are monobasic acids which readily form salts and esters; 6 aminopenicillanic acid, the penicillin nucleus consists of a fused thiazolidine ring and a beta-lactum ring with an amino group at the 6 position." The entry on penicillins includes each of the bulk drugs exported by the appellant except cefadroxyl. This drug is separately dealt with in the Pharmacopoeia. There is however no dispute between the parties that this is not a drug derived from the penicillin. It also can not be in dispute that the starting point for the drugs and formulations exported by the appellant is Penicillin G. Penicillin G is converted into 6APA and by application of different technology and addition of other inputs required each of the final bulk drugs is obtained. It is possible also to make the final drugs without necessarily embarking upon manufacture from the stage of Penicillin G.It is thus possible to manufacture, by purchasing or otherwise acquiring 6APA which has been manufactured to convert this into the finished drugs. These observations hold true for all goods except Cafadroxyl for which the intermediate product is 7ADCA, manufactured again from penicillin G (Cefadroxyl) can also be made from 7ADCA, obtained by a manufacturer).
5. The appellant commenced its manufacture with Penicillin G, proceeding to transform into 6 APA (or 7 ADCA) and thereafter into finished drugs and formulations. These processes were carried out in the same factory at different stages. The Commissioner says, in his order, that because of its starting point being Penicillin G, the appellant manufactured the goods by the Penicillin G route, and that therefore the input will be Penicillin G and other materials which are required to make 6 APA or 7 ADCA and hence not 6APA or 7ADCA.6. Advocate for the appellant contends that reference to the "route" in the norms is unclear and misleading. Reference to the Penicillin G "route" in entry 42, he says, does not justify the view that it is to be applied in cases where the starting point of the manufacture is Penicillin G. He next contends that each norms is separate and distinct and it is the option of the exporter to avail of whichever of the norms is not beneficial to it. The department has no right to decide on which of the norms should apply, provided that the norms selected by the exporter are in accordance with the provisions laid down. He cites in support the decisions of the Tribunal in CCE v. Dynavision which has held that it is open to the importer to avail of any one of the exemptions. In the absence of a specific provision in the norms relating to the particular input to a specific starting point, it is not permissible for the department to apply norms on this basis. The provisions have to be construed strictly for which he relies upon the Supreme Court judgment in Hemraj Goverdhandas v.Union of India 1978 (2) ELT 360.
7. The departmental representative contends that the norms themselves make it clear that inputs for which credit is to be given are related to the process or the technology employed in the manufacture of the exported goods. Thus, where the goods have been manufactured in a process with Penicillin G as a starting point, norms contained in entry 42 will apply, where if the starting point is 6APA or the case of Cefadroxil from 7ADCA, the alternative norms would apply. The appellant's starting point was Penicillin G and the norms applicable to that process have rightly been applied.
8. We must confess to a certain difficulty in understanding the norms prescribed in the policy. Considering the nature of the processes of manufacture of the final products, it cannot be disputed that none of the final products could be manufactured, so far as we are given to understand by both sides, without Penicillin G being the chemical at the starting point of manufacture and without 6APA or 7ADCA emerging as inevitable intermediate product. It may be that this chain of manufacture could be broken and carried out in different places by different manufacturers. Thus one manufacturer may make 6APA or 7ADCA out of Penicillin G and another, elsewhere continued this process for the resultant antibacterial agents which are exported. But taking anything other than a myopic view, it cannot be denied that every process of manufacture of goods has to begin with Penicillin G. The validity of a distinction between Penicillin G route and the other route (which must be a route other than Penicillin G route) therefore is very difficult to accept. There are other difficulties. The scheme is available to the exporters, as distinct from manufacturers, of the kind know as trading houses and export houses. These exporters may purchase large quantities of the goods to be exported from the open market. The starting point by a manufacturer each of these goods manufactured may not be known, and even if known could vary depending upon which part of the consignment exported was purchased from which manufacturer. In that case, which of the norms would apply? Again, let us now consider a person who commences a manufacture not from Penicillin G but from its anterior stage. This is from mould P.Chiysojenum. Such a manufacturer manufactures Penicillin G and thereafter 6APA and amoxycillin. The manufacturer's starting point is not Penicillin G and, therefore, he would not follow Penicillin G route. But he did not begin with 6APA and, therefore, entry 41 would not apply. The departmental representative has an easy answer that such a manufacturer would not get the credit at all if the provisions are strictly interpreted, which he says ought to be done.
9. We must remind ourselves at this point that the concept of the import content for the export product in the passbook scheme is a fictional one. Credit to be granted is not related to the actual content of imported goods contained in the export product; for credit to be granted, it is not even necessary that there should be any import content in these goods. There is no such requirement in the policy. The reference to the deemed import content in the Handbook makes this clear. It appears to us that this procedure is not a procedure for replenishment by import of materials used in the manufacture of export product, as in the DEEC scheme and similar such scheme. It appears to be a measure to grant incentive for export by a method which can be easily administered and provides a handy incentive easily utilisable to the exporter in the form of credit of customs duty available for imported goods, While the object of both types of scheme would be same, to stimulate export, the methodology of formalities seems to be significant.
10. It is therefore not appropriate to go by the technology employed by a particular manufacturer in deciding the norm to apply. As a matter of fact, such an approach would lead to anomalous results. A manufacturer who undertakes the starting stage in one factory and the second stage in another would be entitled to the credit for 6APA, since the starting point in the second factory would be in 6APA. A second manufacturer who undertakes all the processes in one factory would not be so entitled.
That the Customs officers themselves had great difficulty in reconciling themselves to such an approach is clear from the letter dated 15.9.1997 of the Commissioner of Customs to the Joint Director General of Foreign Trade. The Commissioner has expressed his difficulties to the licensing authority as to applying the route followed. He has pointed that most exporters have claimed that they followed the 6APA route. He has also raised the difficulty in determining the starting in many cases and given the example that we have referred to of manufacture taking place in two stages in two factories. He has noted that the Commissioner of Customs at Mumbai has gone on the basis of the declarations given by the exporters and verified by the Central Excise authorities. He has clearly expressed the doubt that the question of applying different norms is difficult in cases where the inputs used are the same in one chain of manufacture at different stages. He has referred to the opinion of the Commissioner of customs that input/output norms were in fact adopted from the DEEC scheme and that the exporters are allowed the options to claim any of the norms set out. To this the licensing authority has furnished no reply.
11. When deciding the norm applicable, we are dealing with an exemption notification deciding the set of norms. The exemption thereafter crystallises into the amount of duty that was payable on these goods if they were imported. It is actually availed of when the import is made and the credit on the goods (which may not necessarily be the goods in respect of which the credit has been granted) is availed of towards payment of duty. The selection of norms therefore is anterior to applying the exemption notification. Given the situation of the norms, and the absence of clear dividing line between the two set of norms, and having regard to the object for which the scheme has been formulated and export promotion, we are of the view that the norms will be determined in accordance with the well settled practice that in such case the benefit of doubt is to be extended in favour of the exporter.
Even if we take the alternative stand, that we are dealing with an exemption notification, we note that the Commissioner of Customs, Mumbai who would be dealing a case of such export has himself accepted the stand that the norms were designed primarily for the DEEC Scheme and it is therefore open to the exporter to claim whichever of the norms would apply to them. Other exporters should not be denied this advantage which would be available to a larger number of exporters.
12. There is yet another way of looking into the question. If the exported goods amoxycillin figures at serial 41, there is no express provision in the policy in determining the norms that it is only to those goods which have been made by one manufacturer starting with the goods anything other than Pencillin G who would be entitled to the norms against this entry. The manufacturer therefore is entitled to credit against this entry.
13. An argument was raised that this interpretation that we attempted might result in one of the two sets of entries made being redundant. It is not possible for us to entirely agree. We may perhaps speculate for example that the Penicillin G route specified in serial 42 to refer to a process of manufacture in which the objective was to manufacturer (sic) [manufacture] only amoxycillin, 6APA coming into existence in a continuous stream of manufacture. We agree that this is only speculation; but in the absence of anything in the policy itself or a clarification from the framers of the policy, the matter has to be decided after considering the various aspects in its best possible.
14. The departmental representative referred to the circular dated 14.5.1996 of the Director General of Foreign Trade. Paragraph 3 of the circular provides that if more than one input is allowed in the alternate for the manufacture of the resultant product, the credit under the passbook scheme the credit shall be allowed for the item having lowest duty incidence. The example shown in this paragraph is of bars/billets. We are of the view that it is only in cases where against the same export item more than one possible alternative input is shown that this provision will apply. Examples at serial 41 against this input is acetone/isopropyl alcohol. The same paragraph 3 of the circular in fact provides that against export of any resultant product more than one input has been allowed under the standard input/output norms credit can be claimed in one or more of these inputs as may be specified by the exporter. Applying this principle one of the one or more sets of inputs can be claimed as input.
15. As a result of this discussion, we are of the view that the appeal succeeds and the appellant was entitled to claim credit.