Judgment:
1. M/s. Concord International (P) Ltd. has filed this appeal being aggrieved with the order passed by the Additional Collector Customs.
The Additional Collector in his order had held as under : "11. In view of the facts and evidences discussed above, I find that the goods in question were not covered by necessary import licence OGL No. 18/85 read with Letter of Approval and approved project report in this case. I also find that the goods imported against hard currency did not undergo any manufacturing process in the zone and were exported as such to a rupee payment area. The conditions for exemption from duties as stipulated in the Customs Notification No. 339/85-Cus., dated 21-11-1985 as amended from time to time have not been complied with by the importer viz. M/s. Concord International Pvt. Ltd., since, these goods are found not to be in conformity with the conditions of import licence and the conditions of Customs Exemption Notification have not been complied with by the importer, I find the goods liable to confiscation under Sections lll(d) and (o) of the Customs Act, 1962 and M/s. Concord International Pvt. Ltd., who by their acts of commission/omission have rendered the goods liable to confiscation under the aforesaid Section have also rendered themselves liable to penalty under Section 112 of the Act ibid. I also find that the goods are not covered by exemption Notification No. 339/85 and that the show cause notice was issued to the party in accordance with the Customs Law and it is well within the jurisdiction of Customs to take appropriate action in the matter including adjudication.
In view of the forgoing facts, circumstances and evidences and my findings, I pass the following order.
I order that goods are liable to confiscation, however, since, the goods are not available for confiscation, an effective order to confiscate the same cannot be passed. I therefore, taking into consideration all the facts and circumstances, impose a penalty of Rs. 10,00,000/ (Ten Lakhs only) on M/s. Concord International Pvt.
Ltd. I also hold that the goods were not eligible for free entry under Customs Notification No. 339/85, dated 21-11-1985. Since the conditions subject to which the said exemption was granted were not fulfilled. Hence, the importer shall pay the import duty assessed by the Assistant Collector of Customs, NEPZ, within 45 days of receiving a demand from the said officer.
This order is being passed without prejudice to the action that may be taken under Customs Act or any other law for the time being in force".
2. The facts of the case are that Notfn. No. 339/85, dated 21-11-1985 exempted certain specified goods when imported into India for the production of goods for exports out of India or for being used in connection with the production or packaging of goods for exports out of India for promotion of such exports by units within the Noida Export Processing Zone at Ghaziabad under certain terms and conditions. The appellants were granted approval by the Ministry of Commerce to set up a new industrial undertaking in Noida Export Processing Zone for manufacture of computer systems, peripherals, spare parts and software.
The appellants imported invoiced as computers /automatisation systems and filed Bills of Entry for their clearance claiming exemption from Customs Duties under Notification No. 339/85-Cus., dated 21-11-1985.
The appellants also claimed clearance of the goods in terms of provisions contained in Appendix 15 of Import Export Policy 1985-88 read with OGL No. 18/85, dated 12-4-1985. On examination of the goods at the time of import, the Customs Authorities were of the view that imported goods valued at Rs. 20,80,522/- covered by B/E No. NEPZ/34/87 and imported goods valued at Rs. 45,05,073/ covered under B/E No.NEPZ/35/87 were not in conformity with their project report approved by the Ministry of Commerce nor were they eligible for exemption under Notfn. No. 339/85-Cus. on the ground that the afore-mentioned goods were in fully assembled form and that what was permitted was discrete components like P.C.Bs, I.Cs., Sockets, connectors, transistors, resistors, capacitors, cables keys etc. during the first year in the phased programme as indicated in the appellants' letter dated 11-2-1987. Further at the time of export, it was noticed that the afore-mentioned goods were in the nature of complete systems for hotel projects/roads/ construction/ institution and did not require any systems engineering. It was therefore alleged that the appellants did not undertake any manufacturing operations in the Noida Export Porcessing Zone on the aforesaid goods for production of goods for export as required under the approved project. It was also alleged that the appellants' import/export was in the nature of switch deal gather than an activity being undertaken on goods for production of export goods. Accordingly, a show notice was issued to the appellants on 1-9-1987.
3. On the date of hearing, Shri Rakesh Tikku, learned Advocate along with Shri J.L. Kotru, Director of the appellant company appeared for the appellants and submitted that the impugned goods invoiced under computerised automatisation systems have been procured as parts and components of the computer systems; that the definition of computer systems is given in the Import Policy 1985-88; that the imported goods are covered under Appendix 15 of the Policy 1985-88 read with OGL No.18/85, dated 12-4-1985; that the revised proposal dated 11-2-1987 clearly envisaged that the end-product was Computer Based Facility Management/Automation systems which was approved as a computer systems; that the items imported fall very closely under OGL and have been received in the form of parts and components of the computer systems; that the exemption Notification No. 339/85-Cus., dated 21-11-1985 should be read as a whole; that in para (iii) of the Notification, it has been laid down that the imports are allowed if the importer satisfies the Development Commissioner of the Zone that the imported goods will be used for the production of goods for exports out of India or in connection with the production or packaging of goods for export out of India or with the promotion of such exports of goods; that they were not aware as to whether the power of the Development Commissioner have been delegated to the Assistant Collector for satisfying as to imports; that in the absence of satisfaction of the Development Commissioner, the consignment cannot be detained; that the difference in wording of Clause (iii) and (vii)(b)(i) of the Notification No.339/85-Cus. clearly points out that the Customs Authorities come into picture only at the stage of non-export; that clause (iii) to Notification No. 339/85-Cus. clearly says that it is for the Development Commissioner to record satisfaction as to whether the goods so imported will be used for production of goods to be exported out of India; that at the point of importation, there was no role for the Collector to play; that the interpretation of the Letter of Approval was the exclusive task of the Development Commissioner; that in terms of Clause (vii) of the aforesaid Notification, the importer was liable to pay duty only on such goods which were not used in connection with the production or packaging of goods within the Zone for export out of India; that the role of Customs starts only when some goods in relation to which exemption was claimed were not actually used in connection with the production of the export goods; that it is well settled in law that even testing and checking is a process of manufacture and therefore, even this aspect will amount to manufacture or production; that the question of Customs being to see whether there has been any manufacture or production at the stage of consignment being exported did not seem to arise; that the above contention was supported by the fact that even packaging is one of the functions allowed in free trade zone; that even simple entre-pot trade is an important means of earning foreign exchange and import into and export from bond after sorting and packaging or even mere re-export have been traditionally allowed; that the value has been added by high technology inputs of selection of items, testing and physical additions; that reading Notification No.339/85-Cus., it would be found that conditions of Clauses (i), (ii), (iii) and (vii)(b)(i) are applicable in their case. According to the revised proposal dated 11-2-1987, NPEZ Board approved addition of necessary capital goods in the second and third year of manufacture; that the impugned items are estimated material requirements in the form of discrete components of the assembled computer systems as envisaged in the 1st year of the phased programme; that the approved proposal clearly envisages import of discrete components in an assembled form initially; that in the first phase of the manufacturing programme required absorption of the technical know-how of such high technical products; that computer technology was a relatively new concept; that the company had necessary infrastructure facilities in the said field, had export orders for exporting computer based facility management systems and that the Ministry had given them time as theirs was a phased manufacturing programme; that the process of analysing of the end-user requirements and translating the same into components and parts of the computer system both in the form of hardware and software is a substantial input requiring enormous knowledge; that engineers were already on the job; that it was neither envisaged nor stated in the approved proposal that the computer systems parts and components would be imported in 100% CKD and/or discrete form in the first year; that the proposal clearly envisaged putting together parts and components of the computer systems along with the software to make them functional; that the assembly of PCBs was not envisaged in the first year as the soldering equipment required for such assembly was to be imported during the second year of programme; that as the goods were allowed for processing prima facie, it appeared that the Customs were satisfied that the goods fell within the ambit of the Notification No.339/85-Cus.; that the show cause notice in para 9 clearly brings out that processing had been carried out by the appellants. On the question of processing, the learned counsel submitted that in the case of Sri Om Prakash Gupta v. CIT and Ors. reported in STC (16) 935, the Hon'ble Calcutta High Court had held " The activity contemplated by the word "process" is general, requiring only continuous and regular action or succession of actions leading to the accomplishment of some result but it is not one of the requisites that the activity should involve some operation on some material in order to its conversion to some other stuff. That being the view, by converting powder into camphor cubes the petitioner processed camphor powder into camphor cubes".
4. That in the case of Bachha Tewari and Anr. v. Divisional Forest Officer reported in STC (14) 1067, the Hon'ble Calcutta High Court had held - "Chopping of timber into firewood is a manufacturing process, and therefore firewood is a manufactured article. There is no reason to exclude the chopping of timber into firewood from the ambit of manufacturing process".
5. That in the case of Chowgule & Co. Pvt. Ltd. and Anr., the Apex Court had held -" Where any commodity is subjected to a process or treatment with a view to its 'development or preparation for the market', it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. The nature and extent of processing may vary from case to case. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. The question is not whether there is manual application of energy or there is application of mechnaical force. Whatever be the means employed for the purpose of carryinq out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing'. This Court speaking through one of us (Pathak, J.) pointed out: 'Commonly manufacture is the end-result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place. Webster' Dictionary gives the following meaning of the word 'process' : 'to subject to some special process or treatment, to subject (especially raw material) to a process of manufacture, deveopment or where therefore any commodity is subjected to process or treatment with a view to its 'development or preparation for the market', as for example, by sorting and repacking fruits and vegetables, it would amount to processing of the commodity within the meaning of Section 8(3)(b) and Rule 13. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder. What is necessary in order to characterise an operation as 'processing' is that the commodity must, as a result of the operation, experience some change. The question is not whether there is manual application of energy or there is application of mechanical force. Whatever be the means employed for the purpose of carrying out the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes 'processing'." 6. That in the case of Chowgule and Co. v. Union of India reported in AIR 1981 SC 1014, the Apex Court had held - "Processing" - What is -Blending of ore of different qualities for obtaining ore of requisite specification - It amounts to processing within contemplation of Section 8(3)(b). The nature and extent of processing may vary from case to case; in one case the processing may be slight and in another it may be extensive; but with each process suffered, the commodity would experience a change. Wherever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The nature and extent of the change is not material. It may be that camphor powder may just be compressed into camphor cubes by application of mechanical force or pressure without addition or admixture of any other material and yet the operation would amount to processing of camphor powder as held by the Calcutta High Court. What is necessary in order to characterise an operation as 'processing' is that the commodity must, as a result of the operation, experience some change".
7. That in the case of Venkatrao Narayanrao Ambedkar v. The Atma Sugar Mills and Anr. reported in AIR 1979 Bombay 38, the Hon'ble Bombay High Court held - "The word 'process' has got several meanings and in fact may mean different things in different context. But looking to the context in which it is used and gathering the natural meaning of the word 'process' must be held to mean to subject a particular product or a commodity with the object of making it finer or improving its quality. It may mean to treat a particular commodity by any method but not in such a way that the commodity itself is completely transformed into a new commodity." 8. The learned counsel therefore, submitted that having regard to the ratio of the decisions in the above cases, it may safely be concluded that processing was a sort of manufacture and that admittedly as processing of the goods was done by the appellant, they are legally entitled to the benefit of exemption under Notification No. 339/85-Cus.
It was further submitted by the learned counsel that the Development Commissioner had allowed the import as he was satisfied that the goods were essential for the export product and had cleared the import; that the letter from Olivetti, Italy for export of computer systems by us to other countries indicates that the processing done by us is of significant nature and was not just a screw-driver technology; that the computer systems parts/components have been assembled and tested for the end-use by the appellants; that switch deal is an import control matter and appropriately falls within the jurisdiction of the licensing authorities; that this case is covered under OGL, it does not fall in the jurisdiction of the Customs Authorities; that the Joint Development Commissioner on 29-7-1987 had verbally agreed that the appellants' end-product being computer systems, the components admissible for import under OGL shall be inter alia computers, peripheral accessories, spare etc.; that the validity of the import is to be seen in terms of the provisions of Appendix 15 of ITC Policy, 1985-88; that if there was a doubt, a reference might have been made to Imports Control Authority for clarification; that for unit in NEPZ Letter of Approval read with relevant OGL is treated as import licence; that the raw material consists of mini-computers, personal computers, monitors key board floppy disc drive, hard disc drive, micro computers work stations, systems software etc.; that it was a turn-key project where sub-systems and components consist of mini-computers, microcomputers, peripheral accessories/spares; that the project never envisaged the production/manufacturing of these sub-systems and components from basic items during the first year; that the process consisted of interaction with the end-user, identifying sources and procurements of suitable hardware, assembling thereof, the development of customised software, systems integration, training of personnel; that the letter dated 27-12-1988 clearly shows that manufacturing of micro-computers from component stage was to start only in the second year.
9. The learned Advocate submitted that the Additional Collector has exceeded his jurisdiction by issue of show cause notice at the point of import as the Customs Authorities come into picture only when the goods are not exported; that in letter dated 11-8-1987, the Collector of Customs desired that it is worthwhile to await certificate from the Joint Development Commissioner. Referring to the letter dated 6-6-1989 of the Ministry of Commerce, the learned counsel submitted that that was not the final decision of the licensing authority. The learned counsel submitted that this view was taken by the Development Commissioner not independently and therefore, cannot be termed as a final order of the Development Commissioner.
10. On the question of the exemption under Notification No.339/85-Cus., dated 21-11-1985, the learned counsel submitted that the benefit was available in respect of production of goods for export out of India or for being used in connection with production/prackaging or for promotion of such exports. The learned Counsel submitted that admittedly, the goods imported by the appellants were used in connection with the production of export goods and therefore, they were fully entitled to the benefit under exemption Notification No.339/85-Cus.
11. The learned Counsel submitted that in the case of Ratan Exports Ltd. reported in 1987 (31) E.L.T. 66, the Hon'ble Supreme Court had held - "Counsel for the appellant has made a solemn statement before us that the entire imported goods would be utilized for export under the existing contract; in case this undertaking really works out, then the appellant shall be entitled to exemption from duty under the scheme.
The learned Counsel submitted that this decision squarely covers their case and in view of the admitted position that impugned goods stand exported no duty should be demanded from the appellant and to that extent the order of the Additional Collector should be set aside. Tho learned Counsel also referred to this Tribunal's order. Final Order C/177/93-B in Appeal No. C/1975/92-B in the case of Emco Electronics Bangalore v. Collector of Customs, Bangalore, wherein this Tribunal had held that "Further the goods have been permitted to be re-exported and therefore, the demand of duty is no longer sustainable. We therefore, set aside the impugned order". The learned counsel submitted that the goods in their case were permitted to be re-exported and actually re-exported and hence following the ratio of the Tribunal's judgment in the above case, the demand for duty in their case should be quashed.
12. The learned counsel also cited and relied upon the decision of the Hon'ble Supreme Court in the case of Bombay Oil Industries Pvt. Ltd. reported in 1995 (77) E.L.T. 32. Relying on the judgment of the Tribunal in the case of Walchandnagar Industries reported in 1995 (8) RLT 289, the learned counsel submitted that this Tribunal had held "The allegation of the Department that the imported components/assemblies and sub-assemblies in the guise of complete machine was not sustainable in view of the earlier show cause notice alleging the import of complete machine in CKD condition without import licence." The learned counsel submitted that the appellant would be entitled to Drawback under Section 74 of the Customs Act, 1962, and therefore, to that extent at least the benefit may be granted to them if their other pleas failed.
13. Concluding his submissions, the learned counsel submitted that in view of the above submissions, the appeal may be accepted.
14. Shri Somesh Arora, the learned JDR appearing for the respondents submitted that a careful reading of the Notification will show that the Customs Authorities had a jurisdiction over the matter, that a lot of arguments were adduced by the appellants stating that it is the satisfaction of the Development Commissioner and not the Customs Authorities for invoking Clause (iii) of the Notification. The learned DR submitted that Clause (vii)(b)(i) reads," the importer shall pay on demand an amount equal to duty leviable on the goods other than capital goods as are not proved to the satisfaction of the Collector of Customs to have been used in connection with the production or packaging of goods ( within the Zone) for export out of India or with the promotion of such export of goods or re-exported within a period of one year from the date of importation thereof or within such extended period as the Collector of Customs may, on being satisfied that there is sufficient cause for not using them or for not re-exporting them within the said period allow"; that this clause very clearly says that the Collector of Customs has the authority to demand duty in terms of conditions stipulated in the clause referred to above; that the first clause reads - The importer shall pay on demand an amount equal to duty leviable on the goods as are not proved to the satisfaction of the Collector of Customs to have been used in connection with the production or packaging of goods. It is clear that the Customs were of the view that the goods in dispute were neither used in the production of export product nor for packaging of the export product. Referring to the appellants' application dated 11-2-1987, the learned DR submitted that annexure 5 available at page 64 of the paper book clearly indicates the estimated annual requirement of the material during the first year reading as under :____________________________________________________________________________S.Item 1st Year 2nd Year .
3rd Year No.No. Imp. Indg.
Imp. Indg.
Imp. Indg.
value value value value value value____________________________________________________________________________A. HARDWARE (a) Printer 33.10 - 46.70 - 50.00 (b) Monitors (high density) 18.57 " 27.00 " 33.10 (c) Plotters 15.92 - 22.15 - 27.60 (d) Mag. Tape Systems 4.81 - 7.20 - 8.82 (e) Hard disk drive 26.86 - 35.80 - 46.50 (f) Floppy Disc 19.89 " 27.30 - 24.4012. Accessories and consumables cage for peripherals (a) Mag. tapes 1.00 - 1.80 - 1.70 (b) Floppy diskettes 3.65 - 4.90 - 6.30 (c) Cartridge tapes 1.65 - 2.25 - 2.85 (d) Others 3.15 0.40 4.30 0.60 6.80 0.8013. Spares 20.60 0.37 30.20 0.80 42.60 1.00B. SOFTWARE 25.00 - 30.00 - 30.00____________________________________________________________________________ 334.94 12.77 454.10 24.10 540.67 30.20 The learned DR, therefore, submitted that since they had not imported these raw materials but had imported completely assembled goods, therefore, they had not used these goods for the production or packaging or in connection with the production of the export goods out of India. The learned DR submitted that a close look at the goods imported shown in the show cause notice will clearly show that the items were in fully assembled form and therefore, they were not used in the production or packaging or in relation to the production of the finished goods and hence were not eligible for the benefit of duty exemption under the aforesaid Notification. On the question whether the goods in question were covered under OGL 18/85 and whether the Letter of Approval and approved project report is to be read along with the OGL for allowing import and granting exemption from duties under the aforesaid Notification, the learned DR submitted that the benefit under the Notification was available to an importer located in the Noida Export Processing Zone and if he was the actual user of the goods imported; that the appellants were required to manufacture the goods indicated in their approved project report right from the first year of their production; that the Ministry of Commerce in their letter No.8/28/86-NEPZ, dated 6-6-1989 addressed to the appellants clarified that OGL certificate in respect of disputed items cannot be issued; that this was a clear indication showing that the goods in dispute imported by the appellants were not covered by the approval granted to them and therefore, the learned DR submitted that the lower authorities rightly denied them the benefit under Notification No. 339/85. The loarned DR submitted that insofar as testing and checking of the goods as a process of manufacture was concerned, the goods in question were supplied by M/s. Olivetti of Italy and before supplying them they must have tested and checked them in their factory. Since the goods were to be exported to Russia they would have been further checked and tested in the factory in Russia before being put to use. Hence, the plea of the appellants that they had tested and checked the goods before exporting them amounts to processing is not acceptable as has rightly been done by the lower authorities. The learned DR also submitted that the shipping bills etc. did not show nor any claim made in the shipping bills to indicate that there was processing of goods for production so as to be eligible for duty exemption under Notification No. 339/85. The learned DR also submitted that there was hardly any role to be played by the appellants in respect of the disputed goods inasmuch as the goods were imported in fully assembled form and were exported as such and therefore, there was no production or manufacturing.
15. On the question of processing amounting to manufacture, the ld. DR submitted that it is well settled in law that every process is not manufcture and only that process amounts to manufacture which brings into existence a new product distinct in name, character and use. The ld. DR submitted that in the present case no new goods were produced and hence the case law cited and relied upon by the appellants does not help them.
16. On the question of duty the ld. DR submitted that the goods should pay duty, however drawback if any admissible to them may be adjusted.
17. On the question of penalty, the ld. DR submitted that the case of imposition of penalty is supported by the decision of the Hon'ble Supreme Court in the case of Ratan Exports (supra), the learned DR submitted that the penalty be confirmed. Reiterating the findings of the lower authorities, the learned DR prayed that the appeal may be rejected.
18. Heard the submissions of both sides and considered them. The appellants argued at length that the Collector Customs had no jurisdiction and that jurisdiction vested only in the Development Commissioner. They referred to clause (iii) of the Exemption Notification No. 339/85-Cus. which stipulated that the importer shall satisfy the Development Commissioner that the goods so imported will be used in relation to the production or packaging of goods for export out of India or with the promotion of such export goods. We find that the exemption under Notification No. 339/85 was applicable to such imports and under this Notification, there was a clear stipulation that on a demand by the Customs Authorities - The importer shall pay the duty leviable on the goods which are not used in the production etc. of the goods exported. We observe from the records in their application dated 11-2-1987 Annexure V, they had indicated that they would be importing PCBs, ICs sockets, Transistors, resistors etc. but what they imported were personal computers, micro-computers, mini-computers etc.; that the disputed goods were in fully assembled form and hence no operation for production of these goods was undertaken. Arguments were adduced by the appellants that if these goods were not produced, they were used in connection with the production of computer systems. From the records, we find that computer systems for a specific purpose were imported and computer systems for the specific purpose were exported. The shipping bills etc. did not indicate that there was any assembly or use of these goods for the production of some different goods. Thus, there was no production in respect of these goods. Moreover, it has been very clearly brought out in the show cause notice that the disputed goods were exported in the same condition as they were imported whereas in the letter of approval of their project, the appellants have clearly specified that during the first year, they would be importing items as indicated in Annexure V. On actual examination, the Customs have found that the goods imported were not raw material as indicated by the appellants but were fully assembled goods and exported in the same condition. It was also argued that the satisfaction of the Development Commissioner was necessary and the Customs have no part to play. We find from the language of the Notification that there are two pertinent steps that arise in the present issue. The first step was the approval of the project and the second point was the levy and collection of customs duty. Insofar as the approval of the project was concerned, it was the sole function and task of the Development Commissioner but insofar as the applicability of the exemption Notification was concerned, it was the sole responsibility of the Customs and therefore, the appellants were not correct in assuming that the Customs had no jurisdiction. On the question that Customs came into picture only when the goods were not exported. We find that this presumption is not correct inasmuch as the customs for the purpose of admissibility of the exemption under Notification No. 339/85-Cus. had to satisfy that the goods were strictly in accordance with the proposal approved. As the goods were not found in conformity with the list in Annexure V of the application for approval, the Customs Authorities rightly held that the goods were not eligible to exemption under the aforesaid notification.
This contention of the department has not been rebutted and no evidence has been brought on record to show that the disputed goods conformed to the goods shown in the approved proposal. We hold that this plea of the appellants was misconceived and hold that the Customs had a jurisdiction to go into the question whether the goods were eligible for duty exemption under Notification No. 339/85-Cus. or not.
19. The second issue that was agitated was that computer facility was new at the time for India and therefore training of a sophisticated kind was necessary. It was argued by the appellants that they trained their personnel by sending them to Italy to get acquainted with the high technology involved as also to Russia to find out the requirement of the user and that they developed software for the purpose and exported computers equipped with software. When pointedly asked whether in the shipping bills, there was any indication that at the time of export, the computers were furnished with software, the learned counsel could not show that this was so. No evidence has been brought on record to prove against the allegation that fully assembled goods were imported whereas the proposal approved by the Development Commissioner envisaged the import of raw materials as indicated in Annexure V of letter dated 11-2-1987. Instead of bringing evidence in support of the proposal approved for the first year the appellants simply submitted that during the first year, they imported goods in semi-assembled form as no manufacturing activity was required to be undertaken during the first year. This contention however, is not supported by the facts on record as according to the proposal submitted to the Ministry of Commerce for approval, the items to be imported as component parts have been indicated in Annexure V to letter dated 11-2-1987. As the appellants did not conform to the pattern of import proposed by them and approved by the Development Commissioner during the first year and imported fully finished goods instead of components and raw materials, therefore, the lower authorities have rightly denied them the benefit of exemption under Notification No. 339/85.
20. On the question whether some processing was done on the goods in dispute, we find that as against the clear allegation by the Customs that the appellants imported fully assembled goods, the appellants could not produce any evidence that they had done any processing on the goods before their export. Instead of bringing in evidence as to what kind of processing of goods was done, the appellants submitted that they checked and tested the goods; that they prepared software according to the requirement of the user before exporting goods. We observe that checking and testing of the goods at the intermediate stage by the appellants was not called for as the goods had been checked and tested by the supplier and were to be checked and tested after installation; that the guarantee for proper operation of the goods was given by the foreign supplier i.e. M/s. Olivetti of Italy. A lot of case law was cited and relied upon by the appellants in regard to the term 'processing'.Union of India v. Delhi Cloth and General Mills and Ors. reported in ECR C 216 (SC) had held-- " We are unable to agree with the learned counsel that by inserting this definition of the word manufacture under Section 2(f), the Legislature intended to equate the processing to manufacture and intended to make mere processing as distinct from the manufacture in the sense bringing into existence of a new substance known to the market, liable to duty". The Apex Court further held- "The sole purpose of inserting this definition is to make it clear that at certain place in fact, the word 'manufacture' has been vised to mean a process incidental to the manufacture of the article. Thus in the very item under which the excise duty is claimed in this case, we find the word in or in relation to the manufacture of which any process is ordinarily carried on with the aid of power". From this ruling of the Apex Court, we find that only such process as brings in a new product with a distinct name, character and use into existence shall be equated with the process of manufacture. In the instant case, the admitted position was that the products set out in the show cause notice were exported as such and these goods were not used for production of new articles into existence in respect of these goods. The case law cited and relied upon by the appellants also supports this view that the process must bring into existence a new product which was not the case in the case before use. We therefore, hold that these items were not eligible for exemption under Notification No. 339/85. The above findings are supported by the ratio of the decision of this Tribunal in the case of M/s. Phoenix Overseas Pvt. Ltd. reported in 1994 (1) RLT 466. In this case, this Tribunal [Paras 5 and 6] had held as under: * * * * * * * In the case of Rattan Exports Ltd. cited supra, the Hon'ble Supreme Court had held that "The counsel for the appellants has made a solemn statement before us that the entire imported goods would be utilized for export under the existing contract. In case this undertaking really works out then the appellant should be entitled to exemption from duty under the scheme. "Similar finding was rendered by this Tribunal in the case of Emco cited supra holding that - "The goods have been permitted to be re-exported and therefore, the demand of duty is no longer sustainable". In the instant case, we find that the goods have admittedly been exported and therefore, we follow the ruling of the Hon'ble Supreme Court as well as of this Tribunal and hold that demand of duty is not sustainable.
22. On the question of pleadings that the /Appellants were entitled to the benefit of drawback under Section 74 of the Customs Act, 1962 and we agree that in case the appellants'case for claim of drawback was admitted by the proper authority they would have been entitled to a particular amount of duty drawback.
23. However, in the matter of penalty we find that the Apex Court in the case of Rattan Exports Ltd. had held "The finding that there has been a violation cannot be interfered with". Appellants had imported the impugned goods and had re-exported them within a short time and this was their first time of import of the goods in the export processing zone, we find that the penalty of Rs.10 lakhs is very much on the higher side. Having regard to the fact that the goods were re-exported, we reduce the penalty to Rs. 2,00,000/ (Rupees two lakhs only).
24. In view of the above findings, the impugned order is modified to the extent stated above and the appeal is disposed of accordingly.