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2010 DIGILAW 999 (KER)

Commissioner of Customs v. Kumarakam Lake Resorts

2010-12-21

BHABANI PRASAD RAY, C.N.RAMACHANDRAN NAIR

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JUDGMENT : C. N. RAMACHANDRAN NAIR, J. 1. This is an appeal filed by the Commissioner of Customs challenging the order of the Customs, Excise and Service Tax Appellate Tribunal, cancelling the adjudication order issued by him against the respondent confiscating the two BMW cars imported by the respondent under Section 111(o) of the Customs Act and demanding differential duty of customs, interest and penalty for violation of the conditions of customs Notification 44/2002 dated 19.4.2002 under which imported cars were released at concessional rate of duty of 5% as against 160% for the normal import of foreign cars. We have heard standing counsel Sri. John Varghese appearing for the appellant and Sri. G. Natarajan appearing for the respondent. 2. The facts that led to the controversy are the following. Respondent is running a hotel mainly accommodating foreign tourists. Government of India issued customs Notification No. 44/2002 dated 19.4.2002 under Section 25(1) of the Customs Act granting concessional rate of duty at 5% on capital goods imported under valid licence issued under Export Promotion Capital Goods (EPCG) Scheme. The condition for granting concessional rate of duty for the import of capital goods based on licence issued under the EPCG Scheme is that importer should execute surety and guarantee agreement in favour of the customs department to fulfil the export obligation, that is to earn five times the CIF value of the goods imported on FOB basis in convertible foreign exchange within a period of 8 years from the date of issue of licence. A further condition for permitting import of capital goods at concessional rate of duty at 5% is that the importer should, within six months from the date of completion of import, furnish installation report of the capital goods imported in their factory premises. Even though Notification as such is for import of capital goods for installation in production industry, the goods produced wherefrom are for export to earn foreign exchange in terms of the notification, it is admitted that hotels catering to the foreign tourists are entitled to import cars for use by the tourists to earn foreign exchange. The respondent in terms of the notification imported two BMW ILA RHD Limousine from foreign countries availing concessional rate of duty at 5% as against 160% payable for the import of foreign cars. The respondent in terms of the notification imported two BMW ILA RHD Limousine from foreign countries availing concessional rate of duty at 5% as against 160% payable for the import of foreign cars. Security bond and bank guarantee were executed in favour of the customs department undertaking that respondent will earn foreign exchange to the extent of 5 times the CIF value within 8 years from the date of issue of licence and they will furnish installation certificate in terms of the notification for the imported cars. There is no dispute on the respondent's entitlement for importing foreign cars for use in the hotel industry because under the import obligation contained in the notification importers rendering services are required to receive payments in freely convertible foreign currency for services rendered through the use of capital goods imported under the notification claiming concessional rate of duty. In fact in terms of the conditions in the notification, what was required by the respondent was to register the two imported cars under Section 66(1) of the MV Act 1988 and make them available for use by the tourists coming to hotel. In fact since installation in the literal sense in respect of capital goods in the form of luxury cars could be done only by producing proof of fitness of the vehicles for rendering services to the foreign tourists coming to hotel, respondent was bound to take tourist taxi permit under the M.V. Act and report compliance within six months in terms of the notification. Respondent on the other hand got the vehicles registered in the name of the Managing Director and Director of the respondent-company respectively and the registration of the vehicles is in the category of "private vehicle". Customs department however did not follow up what the respondent was doing with the imported cars and no action was taken by them for violation of the bond executed, that is failure of the respondent to furnish certificate of registration or permit taken for suitability of the vehicles for rendering services to the foreign tourists. Respondent in fact approached the Joint Director General of Foreign Trade and produced details of foreign exchange earnings from the hotel as a whole, which are essentially collection of rent, food charges, etc. Respondent in fact approached the Joint Director General of Foreign Trade and produced details of foreign exchange earnings from the hotel as a whole, which are essentially collection of rent, food charges, etc. and based on the same, the Joint Director General of Foreign Trade issued a discharge certificate under the EPCG Scheme stating that respondent has complied with the obligation of foreign exchange earnings in respect of the capital goods, namely, two imported BMW cars. Without independently making any enquiry about the genuineness of the certificate issued by the Joint Director General of Foreign Trade, the customs authorities released the bank guarantee, and security bond executed by the respondent under customs notification No. 44/2002. 3. The customs department later found that the respondent notified the cars for sale in complete violation of the conditions on which respondent was allowed to import cars at concessional rate of 5% as against 160% payable. On enquiry it was found that the cars were not even covered by tourist taxi permit making the respondent ineligible to render the cars for use by the foreign tourists. When details of foreign earnings from the two items of capital goods imported, that is, two BMW cars, were called for, the respondent stated that these two cars were used by guests residing in Presidential Suits (Room Nos. 150 and 151)of the respondent's hotel. In fact, statements were recorded from the Administrative Manager of the hotel and also from the Director, who admitted that no tourist taxi permit was taken for two cars at any time and even without the permit, the cars were made available only for pick up from the Airport and dropping back to Airport of those foreign tourists who occupied two Presidential Suits in the hotel. The customs authorities noticed that the total receipt from the two Presidential Suits during the first three years was only US $ 54,851.07. The export obligation of the respondent for availing concessional rate of duty for import of two cars was US$ 2,99,031.30 for one car and for the other car US $ 1,03,800 totalling to US $ 4,02,831. In fact, it is admitted by respondent that they have no records about any specific earning of foreign exchange by providing the two cars for use by the foreign tourists. In fact, it is admitted by respondent that they have no records about any specific earning of foreign exchange by providing the two cars for use by the foreign tourists. Even though in the reply to the show cause notice, there is a general statement that foreign tourists were allowed to use the cars, both the Administrative Manager and Director of the respondent-hotel while giving statement to the department, specifically stated that picking up facility from the airport and dropping back of the tourists at the airport were the only services rendered with the two foreign cars to foreign tourists, that too only for the visitors who were given accommodation in two Presidential Suits bearing Room Nos. 150 and 151 in the hotel. Customs authorities therefore noticed that violations are rather admitted and therefore show cause notice was issued proposing to confiscate the vehicles under Section 111(o) of the Customs Act and for violation of the conditions of import, but at the same time allowing the respondent to redeem the vehicles on payment of redemption fine and along with it differential customs duty payable under Section 28(1), interest payable under Section 28AB and penalty payable under Section 114A of the Act. 4. Before us, standing counsel appearing for the department contended that facts are rather admitted and the only question is whether cancellation of bond and release of Bank guarantee by the department by believing the correctness of the certificate issued by the Joint Director General of Foreign Trade will bar the department from proceeding to issue show cause notice and to take appropriate action including confiscation of cars. Counsel appearing for the respondent on the other hand submitted that discharge of obligation certificate issued under EPCG Scheme by the Joint Director General of Foreign Trade is binding on the customs department and therefore they cannot adjudicate the matter after release of Bank guarantee and security bond. The further contention raised by the respondent is that registration of the cars imported from abroad under EPCG Scheme as Tourist Commercial Vehicles was made mandatory under the Foreign Trade Policy issued for 2004-09 only on 14.6.2006 and so much so non-registration of the vehicles as tourist taxi vehicles under Section 66(1) of the MV Act is not a ground for treating the vehicles as private vehicles. He has also contended that adjudication order is barred by limitation under Section 28 which entitles the department to pass orders within the extended period of limitation of five years only in the case of collusion, suppression, fraud, etc. 5. After hearing both sides and after going through the adjudication order and the impugned order in appeal issued by the Tribunal, we find that violations of the notification and bond conditions by the respondent are patent and uncontroverted. In the first place, the contention of the respondent that requirement of registration of the vehicles as tourist taxi vehicles under Section 66(1) of the M.V. Act is not mandatory under the notification and under the bond conditions until the clarification issued in Exim Policy on 14.6.2006, to our mind is absurd. As already stated, under EPCG Scheme, export obligation is only collection of freely convertible foreign currency for services rendered through the use of capital goods imported. It is common knowledge that cars could be given for use by others only after registering the vehicles as transport vehicles and only after getting permit for use of the vehicles as tourist taxi. In our view, respondent consciously registered the vehicles as private vehicles in the name of the Director and Managing Director and in the statements made by the Manager and Director of the respondent-hotel their case is that even without permit two vehicles were used for rendering services in the form of pick up from the airport and dropping back to the airport to those tourists who occupied two Presidential Suits, Room Nos. 150 and 151. While the export obligation to be fulfilled by the respondent in the course of 8 years from the date of issue of licence was inasmuch as US $ 4,02,381, the total receipt from the two rooms, which is essentially towards rent and food charges, was US $ 54,851. Going by the statement of the Manager and Director of the respondent-hotel and even if the use of cars for rendering services to the foreign tourists without permit is condoned, at the maximum the total receipt from the two rooms that is US $ 54,851, could be considered as foreign exchange earnings of the respondent against export obligation in terms of the notification under which import of the vehicles was done at concessional rate. Counsel for the respondent referred to the clarification issued by the DGFT wherein they say that even if there is no separate account maintained for the use of the imported cars by the hotel industry, still the importer cannot be denied the benefit of concessional rate of duty, if the importer has actually achieved the foreign exchange earnings in terms of the notification. Standing counsel appearing for the department submitted that it is the requirement under the notification and under the bond that respondent should maintain separate account for use of the vehicles. We are of the view that even if all the contentions of the respondent are admitted, what is clear from the facts on record is that respondent has not used the cars for rendering services to the foreign tourists except the limited services rendered to tourists who occupied two Presidential Suits, total collection of which in the first three years was only US $ 54,851. We are of the view that Joint Director General of Foreign Trade recklessly and indifferently issued the discharge certificate under the EPCG Scheme without reference to the customs notification under which concessional rate of import duty was availed by the respondent. This is not a case of customs rejecting the certificate issued by the Joint Director General of Foreign Trade or going against the export and import policy clarified by the DGFT as projected by respondent's counsel. In our view, going by the policy, at the maximum they could contend that without taking permit for the vehicles for use as tourist taxi, they could use the vehicles for rendering services to the foreign tourists. The clarification dated 14.6.2006 issued by the DGFT is not going to save the respondent, because they have no case that cars were used for rendering services to the foreign tourists coming to hotel. It is seen that adjudicating authority has called for the accounts of the respondent and respondent has not accounted any income for hiring the vehicles for foreign tourists. Admittedly they have used the cars for limited purpose of tourists who occupied the Presidential suits. Here again the limited facility provided to foreign tourists was to pick up them from the airport and drop them back to airport. Admittedly they have used the cars for limited purpose of tourists who occupied the Presidential suits. Here again the limited facility provided to foreign tourists was to pick up them from the airport and drop them back to airport. However, we feel the portion of the foreign exchange earnings from the two Presidential suits referred to in the adjudication order should be attributable to the foreign exchange earnings out of the use of the two cards, no matter they were allowed to be used by the foreign tourists in violation of the provisions of the M.V. Act and Rules. 6. We therefore allow the appeal in part by vacating the order of the tribunal and by remanding the matter to the adjudicating authority for estimating the reasonable percentage of total earnings of US $ 54,851 from the two rooms as attributable to the foreign exchange earnings from the two cars and refix the duty, and interest for the balance portion. However, we feel respondent could be exonerated from the personal penalty if differential duty and interest are paid without any delay. So far as confiscation is concerned, we feel if differential duty and interest are paid, then there is no need to confiscate the goods as the import on payment of normal duty does not thereafter involve any violation. If duty and interest are not paid within a reasonable time to be fixed by the Commissioner, they can proceed to levy penalty, confiscate the car, sell the same and recover the whole liability.