2007 Supreme(SC) 1224

2007(7) Supreme 82
Supreme Court of india
(From CEGAT)
S.H. Kapadia & B. Sudershan Reddy, JJ.
Commissioner of Customs, New Delhi — Petitioner
versus
M/s. Phoenix International Ltd. & Anr. — Respondents
Appeal (civil) 8037-8047 of 2001
Decided on : 20-09-2007

important point
When there is an allegation of subterfuge, the court has to examine the circumstances surrounding the import.

Headnote:(a)EXIM Policy 1992-97 – Para 156(A) – Intention plays an important role in matters in which there is an allegation of duty evasion – In present case, a subterfuge was created to show that two independent companies had imported separate parts of the footwear in order to bypass para 156(A) of the EXIM Policy 1992-97 – When there is an allegation of subterfuge, the court has to examine the circumstances surrounding the import to ascertain whether the importer had entered into fictitious arrangement to evade customs duty – In this case, the most clinching circumstance is that there is manufacture of the finished products, namely, “synthetic shoe” for domestic and export markets – It is clear that the entire device of bifurcation was arranged in order to bypass the restriction imposed vide para 156(A) of the EXIM Policy.(Para 11)

       (b)Customs Tariff Act, 1975 – Schedule; rule 2(a), General Rules of interpretation – The shoe uppers were imported by M/s. PIL whereas soles, insoles and sock liners were imported by M/s. PIND and given to M/s. PIL who along with 28 other items (peripherals), procured domestically, manufactured the finished product, viz., synthetic shoes – The entire device was undertaken to show that what was imported were parts and not the footwear in the SKD condition – Therefore, M/s. PIL was the only real importer of all the four items and, in the circumstances, the Department was right in clubbing.(Para 11)

       (c)Customs Valuation Rules – Rule 8 – All four items plus domestically procured peripherals were used in the manufacturing process undertaken by M/s. PIL – Therefore, the importer, M/s PIL, was liable to be assessed under tariff Heading 64.04 and consequently not entitled to the benefit of exemption Notification No.45/94-Cus dated 1.3.94 – Also, soles and insoles as also sock liners were imported by M/s. PIL in the name of M/s. PIND and the synthetic shoes were sold by M/s. PIL through M/s. PIND to the Indian subsidiary of the supplier, Reebok India – Therefore, the Department was right in invoking rule 8 of the Customs Valuation Rules – Impugned judgment of the Tribunal set aside. (Para 12)

       Facts of the case:

       A synthetic shoe, inter alia, consists of vital parts, namely, synthetic uppers, outer soles, insoles and sock liners. M/s. Phoenix International Ltd. (M/s. PIL) were the holders of Quantity Based Advance Licence under which it was entitled to import synthetic shoe uppers, PVC compounds and natural rubber. M/s. PIL imported synthetic shoe uppers numbering 5215 pairs on 16.2.96 declaring CIF value at Rs.19,52,401. On the same day Phoenix Industries Ltd. (M/s. PIND) imported soles and insoles numbering 5151 pairs worth Rs.7,07,806 (CIF). M/s. PIL had imported synthetic uppers under DEEC Scheme whereas soles were imported by M/s. PIND under para 22 of the EXIM Policy 1992-97. Both the companies imported respective items as components/parts. On preliminary enquiry, Department was satisfied that there was an attempt to mislead by importing the above items separately through two different companies as uppers and soles constituted complete synthetic shoes in SKD form. In the preliminary enquiry the Department found that all the cartons were placed in one container with the marking of “Phoenix” without specifying whether the container was meant for M/s. PIL or M/s. PIND. Hence, two show cause notices came to be issued dated 7.5.96 for the period 21.6.95 to 4.11.95 and the second show cause notice dated 1.7.96 for the month of February 1996.

       In the show cause notices it was alleged that the parts imported in the name of two companies were synthetic shoes of “Reebok” brand in SKD form; that the import orders for synthetic uppers, outer soles and insoles had been placed by the two companies on the same Supplier in Bangkok; that the import orders carried the same number; that, both the import orders were signed by Mr. Bhupinder Nagpal, General Manager of M/s. PIL; that the import invoices filed by the two companies referred to the same invoice (proforma) dated 2.11.95; and that the import orders for synthetic shoe uppers, outer soles and insoles were placed by Mr. Bhupinder Nagpal on behalf of the said two companies. According to the show cause notices consumer items were placed in the negative list vide para 156(A) of the EXIM Policy 1992-97 and under the said para of consumer goods in SKD condition or Ready to assemble condition, were required to be imported under specific import licence; that synthetic shoes constituted a consumer item and, therefore, required specific import licence; that, in the present case goods in SKD condition or Ready to Assemble condition were imported without specific import licence despite knowledge on the part of M/s. PIL that all the components of “Reebok” shoes like synthetic shoe uppers, outer soles, insoles and sock liners were meant to be assembled either by them or in their behalf and later supplied to M/s. Reebok International Ltd. or M/s. Reebok India. In the show cause notices it was further alleged that M/s. PIL were the owners of M/s. PIND. In the circumstances, the show cause notices stated that M/s. PIL had resorted to the above subterfuge of importing uppers of “Reebok” shoes in their own name and the remaining three components in the name of M/s. PIND in order to bypass restriction imposed by para 156(A) of the EXIM Policy 1992-97.

       According to the reply to the show cause, the two companies were separately assessed under Income Tax Act, Sales Tax Act and Central Excise Duty. The factories of the two companies were located at different places. About 500 employees were working in respective companies. According to the reply filed before the Commissioner, M/s. PIND was engaged in the manufacture of leather shoes, synthetic shoes, semi-leather shoes, outer soles etc. M/s. PIND were registered as a leather industry. According to the reply, goods manufactured by M/s. PIND including footwear were sold in the domestic market. In certain cases footwear was got manufactured by M/s. PIL on job work basis. In some cases M/s. PIND acted as job workers for M/s. PIL. At the same time, in other cases, M/s. PIL were as job workers for M/s. PIND. According to the reply, M/s. PIL handled, during the above period, overseas sales whereas domestic sales were done by M/s. PIND under the authorization of M/s. PIL. As regards the import in question, it was stated that 5251 pairs of outer soles, insoles and sock liners were imported by M/s. PIND from the foreign Supplier in Bangkok. In reply, M/s PIND objected to the clubbing of imports as is claimed in the show cause notices. It was stated that M/s PIND was 100% fully owned subsidiary of M/s. PIL and, therefore, it was not a dummy company as alleged by the Department. In the alternative, it was submitted that even for the sake of argument imports of two companies were clubbed, yet there was no violation of Foreign Trade (Development and Regulation) Act, 1992. In reply, M/s. PIND stated that the concept of “SKD” did not exist in respect of synthetic shoes; that, in respect of shoes it was not possible to unassemble the product into parts and, therefore, para 156(A) of the EXIM Policy 1992-97 had no application to the facts of the present case. In this connection, it was further stated that in making of shoes a complicated industrial process involving costly machine, workers, technical know-how etc. was involved and that the finished goods cannot be manufactured without further processing and, therefore, it is a misnomer to call synthetic shoe uppers, soles, insoles and sock liners as SKD packs of complete shoes. Reliance was placed also in para 7(12) read with 156(A) of the EXIM Policy 1992-97 and it was stated that since synthetic shoes were not capable of being assembled without further processing they did not attract para 156(A) of the EXIM Policy 1992-97. On the question of applicability of rule 2(a) of the General Rules of interpretation, the importer stated that the said rule was meant only for classification of goods under the Schedule to the Customs Tariff Act, 1975.

       By order dated 12.4.99, the Commissioner held that the imports made by M/s. PIND of soles, insoles and sock liners should be treated as imports by M/s. PIL, however, in view of the elaborate manufacturing process undertaken in the factory to produce a complete footwear it was not possible to hold that complete footwear in SKD condition or Ready to Assemble condition was imported so as to contravene para 156(A) of the EXIM Policy 1992-97; at the same time, the Commissioner held that since the four items had to be clubbed and since the entire operations were undertaken by M/s. PIL and since the four items were essential components of synthetic shoes, rule 2(a) of General Rules of Interpretation stood attract. It was held that all imports attracted duty in the present case at the rate applicable to the footwear and not at the rate applicable to components/parts. Accordingly, the Commissioner held that no duty was demandable in respect of synthetic uppers, imported by M/s. PIL during the period 21.6.1995 to 4.11.1995. However, for imports of soles, insoles and sock liners made by M/s. PIND, exemption under notification 45/94-Cus dated 1.3.94 was not admissible and consequently all the three components imported by M/s. PIND would attract duty at the rate applicable to fully-finished footwear under tariff Heading 64.04. That, there was no exemption for footwear under the said notification as it was available only to parts of footwear. That, since all the components imported by M/s. PIND attracted duty at the rate applicable to fully-finished footwear, the said exemption notification 45/94-Cus dated 1.3.94 was not applicable to the facts of this case.

       In conclusion, the Commissioner confirmed the differential duty.

       Findings of the Court :

       The respondents indulged in subterfuge and violated Rule 8 of the Customs Valuation Rules.

       Result : Appeal allowed.