Judgment:
1. Facts in this bunch of 14 appeals are that the appellants are carrying on their business as Free Trade Zone units set up in Santacruz Electronics Export Processing Zone (SEEPZ). The appellants are engaged in the manufacture and export of gold jewellery. In some of the cases, primary gold was imported by MMTC and it was sold to some of the appellants. In other cases, the appellants themselves imported the gold from abroad. Besides the gold, the appellants also imported mountings and findings for the purpose of manufacture and export of gold jewellery. Finding is nothing but a part of jewellery used in making jewellery. The examples of finding are clasps, hooks, pin backs, jump rings and ear-ring backs. Mounting is nothing but a piece of jewellery that is ready to have the gem stone set in it.
2. The appellants claimed exemption under notifications 177/94-Cus and 196/87-Cus.
3. The notification 177/94 provided inter alia in Clause 8 and 10 thereof as follows:- "(8) Gem and jewellery, including the rejects, manufactured in the said Zone, shall not be brought to any other place in India (that is to say the Domestic Tariff Area) for whatever purpose: Provided that scrap, dust or sweepings of gold arising in the manufacturing process may be forwarded to the Government Mint by the importer for conversion into standard gold bars and return to the said Zone in accordance with the procedure specified by the Collector of Customs in this regard; 10) The Assistant Collector of Customs may allow, subject to the fulfilment of conditions specified in this notification, the loss of percentage of gold specified in column (2) of the Table given below during the manufacture of jewellery of the description specified in the corresponding entry in column (1) of the said Table.
Plain gold jewellery articles un-studded with minimum value addition of 10% or more (on gold content plus wastage) Studded gold jewellery and articles with value addition (on gold content plus wastage) as follows :- (iv) value addition over 50% Gold mountings and findings used in the plain/studded gold jewellery with value addition as follows :- Plain/studded silver jewellery and articles with value additions of silver contents/wastes as follows :- Explanation. (a) the wastage fro mountings and findings is admissible only when such mountings and findings are manufactured from imported gold and are exported as such; and (b) the wastage norms for gold jewellery given under the categories A, B and C of the aforesaid Table shall apply mutandis to the export of platinum/studded jewellery and articles." 4. On 11.11.1995, the Revenue authorities made an inspection of the appellants' premises. While inspecting the same, they found that there were certain discrepancies in the accountal of the gold which the appellants could not explain. Hence, the authorities issued a communication dated 2.2.1996 which reads as under:- During the course of stock taking of gold conducted in the month of December, '95 it has been observed that considerable amount of gold is yet to be recovered from sweep dust/slurry to account for the entire amount of gold imported so far by your Unit.
In this connection, I am directed to call upon the Unit to put all the dust/slurry shown as on the date of stock taking, to refining process to recover the entire amount of gold which was supposed to be recovered, latest by 29.2.'96. As soon as the recovery of pure gold taken place, the same may be informed to the Bond Preventive Officer of your Unit and got quantity of gold verified and certified by him. If you Unit is unable to comply with the recovery action within the above stipulated time, it will be presumed that no gold is recoverable from the dust/slurry available with you, and action to recover duty on the shortage of gold will be taken against your Unit.
5. The department i.e. R&I Division of the Bombay Custom House, issued a show cause-cum-demand notice under Section 28 of the Customs Act alleging inter alia that the appellants have failed to maintain wastage accounts register and claimed duty. In fact in paragraphs 5(i)(ii)(iii) and (iv) of the said notice, the department specifically claimed that there was a failure to keep proper accountal of the said rejects etc.
as referred to in Clause 8 and 10 of the above said notifications. The notice also in paragraph 6 thereof claims that the notice has been issued under Section 28 of the Customs Act as well as in terms of the bond.
6. By their letter dated 24.2.1998, the appellants inter alia submitted that inspection having been done in 1995 and letter dated 2.2.1996 having been issued earlier, the impugned notice could not have been issued invoking larger period of limitation. The appellants also mentioned that the dust and slurry were available and that the gold which is recoverable, is not disputed. If the gold recovered from the slurry is taken into account there will be no shortfall at all. The appellants had also questioned invocation of Section 114(a) of the Act.
7. By another letter dated 22.2.2001, while confirming hearings held on 18^th and 19^th January, 2001 in paragraph 2 thereof, the appellants specifically stated the Assistant Commissioner's confirmation that they have recovered gold to the tune of 6527.627 gms which was 115.673 gms in excess of shortage noticed on 11.11.1995 and this fact was verified by Bond Preventive Officer also on 27.9.1997. They also reiterated the reason as to why invocation of the larger period should not be invoked in the case.
8. The adjudicating authority, after hearing the parties, passed the impugned order dated 27.7.2001 confirming the demand under Section 28 of the Customs Act. In doing so, the Commissioner held inter alia in paragraph 19 of the order that no case of collusion, wilful mis-statement or suppression of facts has been brought out in the show cause notice so as to invoke the provisions of Section 114A of the Customs Act and he dropped the proposal of the department insofar as it related to imposition of penalty under Section 114A of the Customs Act.
As stated earlier, the Commissioner confirmed the demand of duty under Section 28 of the Customs Act and imposed penalty, roughly of 10% of the duty. Hence these appeals.
9. Learned counsel S/Shri V. Sridharan with T. Viswanathan, Prakash Shah and V.S. Modi (Advocate in Appeal C/1232/01) appeared for the appellants. As far as the appellants in Appeals C/1056, 1015, 1026 and 1064/01 are concerned, they did not appear in spite of the fact that the dates of hearing were informed to the counsel for these appellants through Shri V. Sridharan. That did not deter us from going on with these appeals as well because the High Court of Bombay in the writ petition initiated by some of the appellants, had directed the CEGAT to dispose of the appeal within four months. Hence we have taken up these appeals.
11. Shri V. Sridharan arguing for the appellants contended that when the inspection of the appellants' premises having been undertaken on 11.11.1995 and a further letter having been issued on 2.2.199 for non-accountal of the imported gold, there could not have been invocation of the larger period of limitation by the show cause notice dated 13.11.1997. The counsel argued stated that the ingredients of Section 28 of the Customs Act, viz. collussion, misstatement or fraud are absent in the show cause notice. The learned counsel also argued that Clause (8) of the notification (which has been extracted above) provides for rejects, scrap, dust or sweepings of gold which is retrievable whereas the term loss contained in Clause (10) of the notification means that which is not retrievable i..e invisible loss.
To say that even the irretrievable loss should be accounted for is not warranted. His contention is that when the manufacture of the final product, namely jewellery which was exported ultimately, certain portions of the matter viz. gold in the form of findings etc. would not be retrievable that is why in Clause (10) the term loss has been mentioned. It evidently refers to manufacturing loss. Even the percentage to which such loss is acceptable has been indicated in the table to the said clause. When that is the position, how could an irretrievable loss be accounted? The slurry found on 11.11.1995 is nothing but duest etc. referred to in Clause (3) of notification 177/94. In fact the gold recovered from such dust etc. was more than the loss found on 11.11.1995, which position of scrap, dust, sweepings in the factory premises itself was metal, has been accepted by the Bond Preventive officer by his communication on 27.1.1997, as mentioned in the letter dated 22.2.2001 of the appellants' counsel. Moreover it was further argued that annexure 'A' to the show cause notice provides for actual weight of export as well as wastage. When there is a closing balance mentioned in he annexure, that does not take into account the provisions of Clause (8) and the adjudicating authority has filed miserably to note this aspect of the matter. Mr. Sridharan emphatically argued that when the inspection was done in 1995, even if there is a non-accountal, the rate of customs duty prevalent as on that day could not have been adopted for imports made prior to that date. The adjudicating authority has failed to note that the process of manufacture of the final product for purpose of export is a continuous process and the raw material, namely gold is being imported continuously and the production is continuing. Therefore applying the rate of duty as on 11.11.1995 is not correct. He also took us through the show cause notice as well as the impugned order. He challenged the observation of the Commissioner, namely once maximum possible wastage is claimed, even if without record to substantiate the actual quantum of wastage, it would be improper to accept the unit's further claim to adjust shortage of gold found during the stock taking gold recoverable from dust.
12. Learned counsel Mr. Modi adopted the arguments of Mr. Sridharan. He invited our attention to the letter written by the appellant on 2.12.1997 (page 45 of Appeal C/1232/01) which states that quantity of gold lying in the form of dust 2002.761 gms. which was verified by the Customs. He also invited our attention to Public Notice dated 28.7.1988 which mentioned inter alia about maintenance of accounts. Notification 196/87, when we go through it in Clause (5) thereof, mentions maintenance of proper accounts in respect of consumption and utilisation of the imported goods and exports made by the importer and submission of the same to the Assistant Collector of Customs.
13. Learned departmental representative adopted the reasoning of the adjudicating authority.
14. We have considered the rival submissions. At the outset, we have to state that the show cause notice dated 13.11.1997 provides for notice being issued under Section 28 of the Customs Act. However, in paragraph 6, there is a reference not only to Section 28 of the Act but also to a bond given by the appellants. But when we go through the impugned order, there is no discussion of demand being made under bond. This lacuna in the order has not been challenged by the department in terms of Rule 15A of the CEGAT (Procedure) Rules within a month of receipt of the Appeal. The department did not file any memorandum of cross-objection.
15. As far as invocation of Section 28 of the Customs Act to the facts of the case is concerned, we have to observe that inspection of the premises was made on 11.11.1995. A letter was issued on 2.2.1996 demanding recovery of certain sweeping, dust and slurry. The impugned notice was however issued on 13.11.1987. We have to consider whether in the facts and circumstances of the case, the provisions of Section 28 would be applicable. Paragraphs 5(i) and 5(ii) of the notice reads as under:- "5(i). From the above it appears that M/s. M.M.K. Jewellers have filed to maintain the Wastage Account Register for the purpose of monitoring the actual manufacturing wastage of loss, but claimed the maximum wastage/loss according to the value addition achieved and thereby the norms of actual wastage/loss of claim as mentioned in para 4(i) above was made farce and thus they violated the condition of the aforesaid Notifications and Public Notice No. 2/88 dated 28.07.1988.
5(ii). It also appears that M/s. M.M.K. Jewellers have failed to export/account for 6410.885 gms. of gold valued at Rs. 28,72,076.48 claiming it to be lying in dust claiming protection under Sub-proviso to condition No. x to Notification No. 196/87, corresponding to condition No. 8 of Notification No. 177/94." 16. In paragraph 6 of the notice, it has been specifically stated that since there was a shortage as indicated in para 5(i) above, demand under Section 28 of the Act is made. The ingredients of proviso to Section 28 that collusion or any wilful misstatement or suppression of facts are absent in the show cause notice. Section 28 of the Customs Act inter alia provides for issue of notice by reason of collusion or any wilful misstatement or suppression of facts. The notice is also silent as to how such claim could be made by the proper officer as to existence of any or all of the above factors with the basis thereof. In the absence of the same, no demand could be confirmed by any adjudicating authority without first requiring the importer to show cause why he should not pay the amount so specified. Without such legal mandatory requirements are met, no duty could be confirmed by the authority. The show cause notice in the instant case is silent on this aspect. It is quite interesting to note the observation of the adjudicating authority in paragraph 19 which reads inter alia as "No case of collusion, wilful misstatement or suppression of facts has been brought out in the show cause notice so as to invoke the provisions of Section 114A of the Customs Act, 1962." It is not possible that the adjudicating authority could have found existence of three circumstances for demanding duty invoking larger period of limitation, but found none for not imposing penalty under Section 114A of the Act.
In our view, therefore, the adjudicating authority has failed miserably in applying his mind properly to what is contained in paragraph 5(ii) of the show cause notice and again failed miserably to apply his mind whether even a bare reading of the same would enable the adjudicating authority to confirm the demand invoking the proviso to Section 28. As we have said earlier, the words contained in Section 28 of the Act provide mandatorily that the importer must be put on notice as to what the case was against him for demand of duty short paid so that he can show cause why the case cannot be initiated against him for such a demand. What is implied in the rules of natural justice has been expressly made explicit in the Section under review. In our view, therefore, he provisions of Section 28 of the Act could not have been made applicable to the facts of this case. As stated earlier, the show cause notice refers to bond also and the impugned order does not discuss anywhere about the invocation of the bond. In view thereof, the confirmation of the demand by the adjudicating authority under Section 28 of the Act is wrong in law and facts. Therefore, in our view, the same cannot be sustained and it is set aside.
17. We have held that the confirmation of duty is barred by limitation.
But however we are also obliged to give our views on Clause (5) and Clause (8) of the notification. Both of them we will again quote below:- "(5) the importer shall maintain a proper account of import, consumption and utilisation of the said goods and of the exports made by him, and shall submit such account periodically to the Assistant Commissioner of Customs; (8) Gem and jewellery, including the rejects, manufactured in the said Zone, shall not be brought to any other place in India (that is to say the Domestic Tariff Area) for whatever purpose: Provided that scrap, dust or sweepings of gold arising in the manufacturing process may be forwarded to the Government Mint by the importer for conversion into standard gold bars and return to the said Zone in accordance with the procedure specified by the Collector of Customs in this regard;" Both of them when we read together, it will show that under Clause (5), the importer is obliged to maintain proper accounts of the import, consumption and utilisation of the imported goods, namely raw materials and exported final products and the proper accounts should be submitted periodically to the Assistant Commissioner. Clause (8) of the notification specifically provides for that aspect of the manufacturing process, namely invisible rejects or waste arising during the manufacture of final product. Clause (5) of the notification clearly provides for accountal of the imported goods, namely the raw material and the exports made by the importer, i.e. raw material and final product exported. This specifically provides for what could be seen by the naked eye and which could be easily accounted. But one has to be practical that when the gem and jewellery are manufactured out of the raw material, namely a primary gold. Occasion may arise when the gold when it is converted from primary from to the end product, there may be certain dust which may fly from the place of manufacture or it may even be irrecoverable loss due to the process of manufacture of the final product. It can be invisible. The table to the notification also states how much is the percentage of gold which could be allowed for wastage.
In fact the explanations contained under the table state clear that mountings and findings and wastages arising therefrom are allowed. The same has been explained in paragraphs 3.2 to 3.6 of the appeal which read as under:- "3.2 The appellants further pointed out that as the Assistant Commissioner ought to be aware the seals were removed by the concerned Officers on 07.02.1996 after which the appellants began the process of recovery of gold. In view of the large quantity of dust involved from which the gold was to be recovered and in view of the limited refining capacity available with the appellants, the appellants worked hard to recover the gold from the dust by the deadline of 29.02.1996, that was fixed by the Assistant Commissioner in his letter referred above.
3.3 The appellants further pointed out that the total recovery came to 15,272.40 grams about which the Bond officer was orally informed.
A letter dated 08.03.1996 (Annexure 3 hereof) was also addressed to the Assistant Commissioner in this regard. In response to this letter the Bond Preventive Officer came the same day and personally verified the recovery effected.
3.4 The appellants pointed out that the quantity of 19688.60 grams mentioned in the show cause notice was wrong and the correct figure of quantity available in dust and slurry at the time of physical verification on 11.11.95 was 17386.31 grams.
3.5 The appellants pointed out that as a result of recovery the shortage in stock was reduced from 17386.31 grams to 2113.91 grams which should be treated as part of the manufacturing loss which together with the approximate claim of wastage at the time of making of jewellery was within the permitted wastage allowance as per the Notification. Hence it was clear that there was no shortage and hence demand of duty was unsustainable in law and on facts.
3.6 The appellants also requested for personal hearing as well as cross-examination of the witnesses by the appellants counsel." Paragraphs 90 of the Policy and paragraph 14 of the Procedures deal with the same and specifically state that the wastage for jewellery is allowed as manufacturing loss recognising such losses upto limits specified, practically not possible to recover.
18. In fact it has been specifically stated in the grounds of appeal that one of the provisions in paragraph 88 part-E of the Policy that gold may be sent to the Government mint or private mint and may be returned to tem in gold bars, i.e. by not using the term waste or wastage. The Policy recognises that in the manufacture of gold and jewellery, there can be invisible wastage. In fact Clause (10) of the notification specifically provides that the Assistant Commissioner may allow the loss of percentage of gold in column 2 of the table. From the reading of Clause (10), it is clear to us that the Government recognises such invisible loss arising in the manufacture of jewellery out of the gold imported.
19. We are therefore of the view that on the merits also the department does not have good case. Therefore, imposition of penalty on the appellant is wrong in law. We are of the view that the words used in Clause (5), (8) and (10) of the notification have not been appreciated by the adjudicating authority.
20. All the appeals are therefore allowed with consequential relief, if any, according to law.