Customs cannot treat imported cattle feed as prohibited goods merely on allegations of diversion for human consumption, particularly when laboratory reports indicate the goods are unfit for human consumption, the Madras High Court held on 28 September. A Division Bench of Justices Anita Sumanth and S. Raveekumar upheld the release of a 500-bag consignment of agricultural rejected nut pieces imported by S.R. Rajarajendiran, proprietor of Asia Gate Exims, against sufficient indemnity, while allowing adjudication proceedings to continue.

"The argument that the goods are prohibited is, as at this stage at any event, baseless and of no merit whatsoever," the Bench said.

Customs had detained the consignment after an alert from the National Customs Targeting Centre flagged instances of consignments declared as cattle feed allegedly containing cashew kernels. A seizure memo was later issued and its validity extended; Rajarajendiran challenged it. A Single Judge quashed the extension order and directed release against indemnity, prompting the department's appeal.

The Court reviewed three laboratory reports: one found the goods unfit for human consumption, another found the extracted fat's acidity exceeded permissible limits, and a third found parameters within limits for compounded cattle feed but could not assess fitness for human consumption.

Customs argued importers had allegedly diverted similar consignments for human consumption products, and that the declared import price of Rs 90 per kg fell below the Rs 680 per kg threshold in a customs alert concerning broken cashew kernels. The Court rejected both submissions as insufficient grounds for continued detention, noting Customs failed to produce any notification supporting the minimum price threshold despite being asked for it. A purchase order from a women's milk producers' cooperative society for cattle feed supported the importer's claimed intended use.

Six-month seizure deadline question referred to Chief Justice

The Bench also examined how to calculate the period for extending seizure under Section 110(2) of the Customs Act, 1962, which requires Customs to issue a notice under Section 124(a) within six months of seizure, failing which goods must be returned, subject to the statutory extension mechanism.

On whether the period runs from the date of detention or the date of seizure, the Court noted conflicting views in two earlier Division Bench judgments: ALM Enterprises v. Commissioner of Customs (Imports), Chennai treated the seizure date as relevant, while K. Steamship Agencies Pvt. Ltd. v. Balaji Dekors treated detention as synonymous with seizure. Since the later Bench had not considered the earlier judgment, the matter was referred to the Chief Justice for consideration of a larger Bench.

It also held that a subsequent extension order issued during the pendency of the appeals had become infructuous, dismissed the appeal challenging that order, and upheld the direction to release the consignment against sufficient indemnity.

CENVAT credit upheld for works contract supplies

In a separate ruling on 9 October, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) at Chennai held that the Explanation to Rule 3 of the CENVAT Credit Rules, 2004 does not bar CENVAT credit on duty-paid capital goods transferred under a works contract, as the value of such goods falls outside the service tax levy.

A Bench of Judicial Member Ajayan T.V. and Technical Member Vasa Seshagiri Rao allowed appeals by Toshiba JSW Power Systems Private Limited, a manufacturer of turbines, generators, motors and rotary converters, which engaged contractors for design, supply, installation and commissioning at its Manali factory.

The company issued letters of intent and separate purchase orders for equipment supply and for installation, testing and commissioning; contractors' duty-paying invoices named them as buyers and Toshiba JSW as consignee, and they separately charged service tax on erection and commissioning services.

Toshiba JSW claimed CENVAT credit on the excise duty paid on the goods as capital goods and on the service tax charged for erection services. The Department denied credit, arguing the contracts were composite engineering, procurement and construction contracts and the goods became part of an immovable, non-excisable plant. Relying on Rule 2A of the Service Tax (Determination of Value) Rules, 2006 read with the Explanation to Rule 3, the adjudicating authority confirmed the demand; the Commissioner (Appeals) upheld that decision.

Immovability does not defeat capital goods credit

The Tribunal accepted the contracts were, in substance, works contracts and ownership passed to Toshiba JSW at the latest when the contractors incorporated the goods into the plant, but held this did not defeat credit because the goods were covered by duty-paying invoices, received at the factory and used as components of the manufacturing plant. The rules did not require the claimant to own the goods on receipt or install them itself.

"If the immovability of an installed plant defeated credit on its components, capital goods credit would be unavailable for most of the goods for which the definition was framed," the Tribunal observed.

On the Explanation to Rule 3, the Bench distinguished goods whose value falls outside the service tax levy from goods exempted from an otherwise applicable levy. The exclusion of such goods under Notification No. 12/2003-ST or Rule 2A did not constitute an exemption triggering the Explanation.

The Tribunal also held that the extended period of limitation could not be invoked because Toshiba JSW had claimed credit on duty-paying invoices, recorded it in statutory records and disclosed it in returns. It allowed both appeals and granted consequential relief.