Pranav B Prem

In a significant ruling, the Delhi Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) has held that pan masala and gutkha are "freely exportable" under the Foreign Trade Policy (FTP), thereby quashing the confiscation of export consignments and penalties imposed on M/s Pan Parag India Ltd. and M/s Kothari Products Ltd. The division bench comprising Dr. Rachna Gupta (Judicial Member) and Ms. Hemambika R. Priya (Technical Member) set aside the customs authorities' actions, stating, "the goods exported i.e. pan masala and gutkha were freely exportable goods in terms of Foreign Trade Policy. Those have wrongly been called as prohibited for alleged violation of the conditions meant for duty free imports."

Background of the Case

The case arose from an investigation initiated by the Directorate of Revenue Intelligence (DRI) against M/s Pan Parag India Ltd. and M/s Kothari Products Ltd. The authorities alleged that the companies were defrauding the government by misusing the Duty-Free Import Authorization (DFIA) scheme. Under this scheme, exporters must declare the technical characteristics, quality, specification, and value of essential oils used in the manufacture of exported goods in their shipping bills while applying for DFIA licenses under Chapter 4 of the Foreign Trade Policy (2004-09 and 2009-14). The department alleged that the appellants failed to declare these details in the shipping bills during exports between June 2006 and September 2011, thus violating Para 4.55.3 of the Handbook of Procedures (HBP), Notification No. 40/2006-Cus., and Notification No. 98/2009-Cus. Consequently, show cause notices were issued proposing the confiscation of export consignments under Section 113(d) of the Customs Act, 1962, and penalties on the companies and their directors under Section 114 of the same Act.

Also Read: CESTAT: Service Tax, Fine, or Penalty Not Considered Pre-Deposit For Filing Appeal

Findings of the Tribunal

The CESTAT rejected the customs authorities' claims, holding that the exported goods did not qualify as "prohibited" under Section 113(d) of the Customs Act. The bench observed, "there is no evidence to support the violation of Condition No. (i) of both the notifications (40/2006 and 98/2009)." The tribunal noted that the notifications were applicable only to imports under the DFIA scheme and did not restrict the export of goods.

The tribunal further pointed out that the Customs authorities had no jurisdiction to adjudicate issues falling under the Foreign Trade (Development and Regulation) Act, 1992 (FTDR Act). It remarked, "Officer of Customs have not been given any power to adjudicate any dispute under Foreign Trade Development and Regulation Act, 1992. It is the authorities under FTDR Act, 1992, who can adjudicate disputes under FTDR Act."

No Evidence of Misuse of DFIA Scheme

The CESTAT held that the customs department failed to produce any evidence establishing a nexus between the imported essential oils and the exported goods. The tribunal found that "the Revenue/department has failed to produce any evidence to prove that the exported goods were the resultant goods and were not of same quality, technical characteristics and specifications as those of the inputs used."

Moreover, the tribunal highlighted that the appellants predominantly procured raw materials domestically, including synthetic essential oils, except in exceptional cases. The judgment categorically stated, "there is no evidence that the impugned goods were prepared from synthetic essential oil or the natural essential oil that too the one which was imported under DFIA Scheme."

Double Jeopardy and Jurisdictional Overreach

The tribunal also criticized the customs authorities for initiating proceedings despite the DGFT (Directorate General of Foreign Trade) already penalizing the appellants for the same alleged violations. Referring to the principle of double jeopardy, the CESTAT remarked, "The impugned order imposing penalties on exporter and their Director amounts to 'double jeopardy'. Appellate authority of DGFT had required customs to effect recovery of penalties imposed."

Further, the bench held that the customs authorities encroached upon the jurisdiction of the DGFT by issuing show cause notices instead of initiating recovery proceedings, as already directed by the DGFT. The tribunal stated, "Issuance of impugned SCN instead of initiating recovery proceedings is liable to be set aside being the act of encroachment of jurisdiction that too for such cause which stands already adjudicated by the competent authority."

Interpretation of 'Prohibited Goods'

Addressing the central issue of whether the non-disclosure of technical characteristics rendered the goods "prohibited," the tribunal clarified that the definition of "prohibited goods" under the Customs Act refers to items explicitly restricted under any law. Since no such restriction existed for the export of pan masala and gutkha, the CESTAT concluded that "based on impugned allegations freely exportable pan masala and gutkha cannot be called as prohibited goods."

Also Read: ITR Alone Insufficient To Confirm Service Tax Demand: CESTAT

The CESTAT conclusively ruled in favor of the appellants, setting aside the confiscation and penalties. It held that the customs authorities lacked jurisdiction and failed to provide evidence of any violation directly under the Customs Act.

Appearance

Present for the Appellant: Shri Pramod Kumar Rai & Shri Anirudh, Advocates

Present for the Respondent: Shri Mihir Ranjan, Special Counsel

Cause Title: M/s Kothari Products Limited Versus Commissioner of Customs (Export) New Delhi (ICD TKD)

Case No: Customs Appeal No. 52295 of 2021

Coram: Hon'ble Dr. Rachna Gupta [Member (Judicial)], Hon'ble Ms. Hemambika R. Priya [Member (Technical)]

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