CESTAT Chennai on classification of used rails and mandatory customs valuation sequence

The Customs, Excise & Service Tax Appellate Tribunal (CESTAT), Chennai, in Mahesh Varman Vs Commissioner of Customs, decided a batch of six connected customs appeals arising from a common adjudication order. The lead matter was Customs Appeal No. 40089 of 2014 filed by Shri Mahesh Varman, and the remaining appeals involved M/s. J.R. Smelters Pvt. Ltd. (JRS), its personnel and related intermediaries including a Customs House Agent.

The dispute stemmed from multiple imports made by M/s. J.R. Smelters Pvt. Ltd., where the goods were declared as “Scrap Metal/Heavy Melting Scrap (HMS 1 & 2)” under CTH 7204 4900. The Directorate of Revenue Intelligence (DRI), Chennai Zonal Unit, alleged that the consignments actually contained used railway rails, railway sleepers, re-rollable scrap, G.I. angles and other material, along with misdeclaration of quantity and undervaluation. The Department also linked the clearances to various individuals said to have facilitated or abetted the imports.

The Tribunal’s order addresses three broad clusters of issues:

Classification – whether the used rails and allied materials should be treated as “waste and scrap” under CTH 7204 or “railway track construction material” under CTH 7302/7301.
Valuation – whether the declared transaction value could be rejected and, if so, whether the enhanced values were determined in accordance with the Customs Valuation (Determination of Value of Imported Goods) Rules, 2007 (CVR 2007).
Consequential matters – exemption under Notification No. 21/2002-Cus., demand of differential duty, confiscation, redemption fine and penalties under Section 114A, Section 114AA and Section 112(a) of the Customs Act, 1962.

The Tribunal partly upheld the assessee’s stand on classification, but found serious legal infirmities in the valuation and consequential determinations, leading to a limited remand.

Factual background of the imports and investigation

Impugned consignments

M/s. J.R. Smelters Pvt. Ltd. filed the following Bills of Entry through M/s. Santon Shipping Services, Chennai (CHA):

Bill of Entry No. 616429 dated 02.09.2010
Bill of Entry Nos. 626444 and 626445 dated 14.09.2010

The description declared was “Scrap Metal/Heavy Melting Scrap” under CTH 7204 4900. Acting on specific intelligence that used railway rails were being brought in as HMS to avail concessional duty and avoid restrictions, DRI examined the consignments. According to the investigation, the goods actually comprised:

Used rails
Metal railway sleepers
Bars, PR clips and re-rollable scrap
G.I. angles
Excess quantities in two consignments compared with the declared figures

The first lot of 20 containers, linked to Bill of Entry No. 616429, was seized under a mahazar dated 17.09.2010, with a value of about Rs. 1 crore, on the basis that the description, quantity and value as declared did not match the physical goods.

Role of intermediaries and NML testing

The investigation traced the operational handling of the clearances to Shri Mahesh Varman, Partner of M/s. Swamy Agencies, allegedly acting as a proxy for the CHA. The Department alleged that Shri N. Dhanraj and Shri M. Mahesh Varman were central figures in organizing the customs clearances for the importer.

There was also a procedural irregularity: though examination of the containers was directed at Sanco CFS, Chennai, the examination report was entered in the Customs system by an officer posted at Gateway Distriparks Ltd. CFS, where the goods were not actually lying.

Samples were referred to National Metallurgical Laboratory, Chennai (NML), which opined that the materials were not fit for reuse as rails or sleepers and were only suitable for melting/re-rolling. Portions were fit for re-rolling; the balance was Heavy Melting Scrap.

Past imports

Beyond the three live consignments, the investigation covered 17 earlier Bills of Entry (listed in Annexure VI to the Show Cause Notice), cumulatively involving 2334.31 MT of goods initially declared as various kinds of scrap such as “Scrap Metal HMS 1&2 Loose”, “HMS 1&2 un-shredded Scrap”, “Heavy Melting Scrap” and “Shredded Scrap (HMS 1 & 2)”.

The Department re-characterised these as:

836.65 MT of “used rails”
202.81 MT of “used bails”
53.280 MT of “Light Melting Scrap”
1240.580 MT of “Heavy Melting Scrap”

The goods under these 17 Bills of Entry had already been cleared and were not physically available at the time of adjudication.

Adjudication order

The Commissioner passed Order-in-Original No. 22244/2013 dated 24.10.2013, inter alia holding that:

The three present consignments contained used rails/metal railway sleepers, re-rollable scrap, G.I. angles and melting scrap rather than HMS 1 & 2 as declared.
The 17 past consignments comprised used rails, used bails, light and heavy melting scrap as tabulated in the order.
The goods described as “used rails/used metal railway sleepers/used bails/G.I. angles” were classifiable under CTH 7302 and CTH 7301.
Benefit of Notification No. 21/2002-Cus. (Sl. No. 200) was denied for goods so classified.
The declared values were rejected under Rule 12 of CVR 2007 and enhanced values were determined under Rule 3/Rule 9 read with Section 14(1).

On this basis, the Commissioner:

Confirmed a differential duty demand of Rs. 54,14,265/- under Section 28(2), along with interest under Section 28AA/28AB.
Ordered confiscation of the three impugned consignments under Section 111(d), Section 111(l) and/or Section 111(m), giving options of redemption fine (Rs. 10,00,000/- for Bill of Entry No. 616429 and Rs. 7,00,000/- for Bills of Entry Nos. 626444 & 626445).
Held the past 17 consignments liable to confiscation, though no redemption fine was imposed as goods were no longer available.
Imposed:
- Penalty of Rs. 54,14,265/- on M/s. J.R. Smelters Pvt. Ltd. under Section 114A.
- Penalty of Rs. 5,00,000/- on the company under Section 114AA.
- Appropriation of Rs. 75,00,000/- paid during investigation and enforcement of Bank Guarantee of Rs. 33,80,000/-.
- Personal penalties under Section 112(a) on:
  - Shri Pramod Singh – Rs. 5,00,000/-
  - M/s. Santon Shipping Services – Rs. 3,00,000/-
  - Shri Bose J. Fernando – Rs. 2,00,000/-
  - Shri N. Dhanaraj – Rs. 2,00,000/-
  - Shri Mahesh Varman – Rs. 2,00,000/-
  - Shri S. Vijaya Sankar – Rs. 2,00,000/-

Appeals were filed by the importer, its officers, the CHA, the CHA’s partner, and individuals including Shri Mahesh Varman.

Core issues before the Tribunal

The Tribunal identified the following principal questions for determination:

Classification
- Whether the imported consignments, declared as HMS 1&2/scrap metal, were in fact “used rails/used metal railway sleepers/used rails or beams, re-rollable scrap, G.I. angles, light melting scrap and heavy melting scrap”.
- Whether the disputed goods described as used rails/used sleepers/used bails/G.I. angles were correctly classifiable under CTH 7302/7301, or whether they should be regarded as “ferrous waste and scrap” under CTH 7204 as urged by the assessee.
Valuation
- Whether the declared transaction value under the 20 Bills of Entry could be rejected under Rule 12 of CVR 2007.
- Whether the enhanced values were legally re-determined in line with the sequential rules under CVR 2007 read with Section 14.
Exemption and duty
- Whether the assessee was entitled to **Notification No. 21/2002-Cus.

Customs valuation must follow Rules; used rails imported as scrap: CESTAT Chennai’s key findings in Mahesh Varman Vs Commissioner of Customs