CESTAT Ahmedabad Sends SEZ Fabric Import Case for De Novo Adjudication Due to LOP Ambiguity and Valuation Issues

Background of the Dispute

The matter in Commissioner of Customs Vs Om Siddh Vinayak Impex Pvt Ltd came up before CESTAT Ahmedabad in relation to an import made by a Special Economic Zone (SEZ) unit at Kandla. The respondent, operating as an SEZ unit, imported 25,603.2 kgs of synthetic fabric lots through Bill of Entry No. 2376 dated 25.09.2003. The goods were declared as “100% polyester plain dyed fabrics” and classified under CTH 54075290. The declared assessable value was Rs. 8,45,572/-, and the assessee claimed exemption from customs duty under Notification No.137/2000-Cus. dated 19.10.2000.

Customs drew two samples from the consignment and forwarded them to CRCL, Kandla on 13.10.2003 for testing. The test results indicated that the fabric contained texturized yarn in the range of 60% to 63.5%, which fell short of the 85% threshold required for goods to be legitimately classified under CTH 54075290.

Based on these findings, the department provisionally assessed the Bill of Entry on 10.02.2004 and released the goods. Subsequent finalisation of assessment on 09.03.2007 led to reclassification of the goods, denial of the claimed exemption, enhancement of the assessable value, and confirmation of substantial differential duty.

Initial Finalisation of Assessment and First Appellate Round

Department’s First Final Assessment

In the initial final assessment order dated 09.03.2007, the assessing officer:

  • Denied the exemption under Notification No.137/2000-Cus.
  • Treated the original classification under CTH 54075290 as incorrect due to the CRCL test report showing lower texturized yarn content.
  • Finalised the assessment by demanding differential duty of Rs. 71,57,744/- along with interest.

The assessee appealed to the Commissioner (Appeals).

First Order of Commissioner (Appeals)

The Commissioner (Appeals), by order dated 20.03.2008, set aside the final assessment on the following main grounds:

  • The CRCL test report relied upon for reclassification was not supplied to the assessee either before or after passing the finalisation order.
  • The order lacked a reasoned discussion as to why the benefit of Notification No.137/2000-Cus. had been denied.

On this basis, the matter was remanded to the adjudicating authority with a direction to pass a speaking order after observing the principles of natural justice. Pursuant to this, the Deputy Commissioner issued a show cause notice dated 18.12.2008, annexing the relied-upon documents and test reports.

De Novo Adjudication and Second Round of Appeals

Order-in-Original Dated 12.11.2015

On remand, the Deputy Commissioner, Kandla SEZ, conducted fresh adjudication and passed an Order-in-Original dated 12.11.2015. In this order, he:

  • Rejected the declared transaction value of Rs. 8,45,572/-.
  • Reclassified the goods under CTH 54078290 instead of CTH 54075290.
  • Enhanced the assessable value to Rs. 20,66,877/- on the basis of contemporaneous imports of allegedly comparable goods.
  • Confirmed differential duty of Rs. 71,57,744/- along with applicable interest.

The assessee again filed an appeal before the Commissioner (Appeals).

Second Order of Commissioner (Appeals)

By order dated 11.05.2016, the Commissioner (Appeals) once again set aside the Deputy Commissioner’s order and allowed the assessee’s appeal. This led to the Revenue filing the present appeal before CESTAT Ahmedabad.

Revenue’s Case Before the Tribunal

Revenue’s challenge to the order of the Commissioner (Appeals) was premised on multiple grounds, which broadly covered:

1. Alleged Violation of Notification No.137/2000-Cus.

  • The assessee, as an SEZ unit, had been issued a Letter of Permission (LOP) dated 30.01.2002 by the Development Commissioner, Kandla SEZ.
  • As per Revenue, the LOP authorised activities such as manufacturing/processing of old, used, worn clothing and rags, mutilation, drawing yarn from old and used clothes, and similar operations.
  • Revenue contended that the LOP did not permit manufacture or processing using new fabrics, nor did it allow import of fresh synthetic fabric for such manufacture without special permission from the specified officer.
  • According to Revenue, the assessee therefore did not fulfil the conditions of Notification No.137/2000-Cus., which exempts goods imported into India for manufacture by units within SEZs for authorised operations.

2. Infrastructure and Actual Use of Imported Goods

  • Revenue asserted that the assessee had only Rag Cutter machines and Baling Press machines, but no machinery to manufacture readymade garments from fresh fabrics.
  • Statements of the Directors reportedly indicated lack of facility for manufacturing garments from new fabrics.
  • The department alleged that the imported synthetic fabric was diverted into the Domestic Tariff Area (DTA) as such, without being subjected to manufacturing processes contemplated in the LOP, and that removal into DTA occurred without requisite permission from the specified officer of KASEZ.

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