$~ 10
IN THE HIGH COURT OF DELHI AT NEW DELHI
Decided on : 26.11.2018

+ CUSAA 147/2018 CM APPL. 23960/2018

COMMISSIONER OF CUSTOMS (EXPORT) ….. Petitioner
Through: Mr. Amit Bansal, Senior
Standing Counsel.
versus
KOTHARI FOODS FRAGRANCE PVT. LTD…… Respondent

Through: Mr. Pankaj Bhati, Mr. Amit
Awasthi, Mr. Dhruv Surana and
Mr. Ashish Choudhary,
Advocates.

CORAM:

HON’BLE MR. JUSTICE S. RAVINDRA BHAT
HON’BLE MR. JUSTICE PRATEEK JALAN

MR. PRATEEK JALAN, J (OPEN COURT)
%

1. This appeal filed by the Revenue, under Section 130 of Customs
Act 1962 (hereafter, “the Act”), is directed against an order dated
01.09.2017 passed by the Customs Excise and Service Tax Appellate
Tribunal (hereafter, “the Tribunal”) in Appeal No. C/53217/2015. By
the impugned order, the Tribunal allowed the Respondent/ Assessee’s
appeal against an order dated 04.06.2015 passed by the Commissioner
of Customs (Exports), New Delhi and set aside the redemption fine
and penalty imposed.

2. The present appeal was admitted on 03.08.2018 and the
following questions of law were framed for consideration:

CUSAA 147/2018 Page 1 of 13

“(i) Did the Customs Excise and Sales Tax Appellate
Tribunal (hereinafter „CESTAT‟) fall into error in its
interpretation of Notification No. 40/2006-Cus dated
01.05.2006, and also with respect to para 4.55.3 of the
Handbook of Procedure for Export and Import;

(ii) Did the CESTAT err in law in its appreciation of
specifications that the exporter had to provide and the
declaration required, in terms of the above Notification
No. 40/2006-Cus read with para 4.55.3 of the Handbook
of Procedure for Export and Import) in the
circumstances of the case?”

3. The facts giving rise to this appeal are not in dispute. During the
period 2006-09, the assessee used to clear and export its goods,
namely pan masala and gutka. These exports were covered by a Duty
Free Import Authorization license (hereafter, “DFIA License”) issued
by the Director General of Foreign Trade (hereafter, “DGFT”), under
the prevalent Foreign Trade Policy (“FTP” hereafter) of the Centarl
Government. Based on the its records and the statement of the
assessee’s Director, Shri Vikram Kothari, as well as statement of
perfume suppliers, the revenue issued a show cause notice (dated
21.06.2013) alleging that the assessee had contravened the provisions
of Paragraph 4.55.3 of the Handbook of Procedure of Import and
Export (hereafter, “HBP”) and an exemption notification dated
01.05.2006 (Notification No. 40/2006-Customs, hereafter “the
exemption notification”) issued by the Customs authorities. According
to the Revenue, the effect of the HBP and the exemption notification
was that the assesse had to mention the technical characteristics,
quality and specifications of the perfumes/essential oils/ aromatic

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chemicals used by it in its shipping bills. The assessee resisted the
show cause notice and contested the proceedings.

4. In the Order-in-Original dated 04.06.2015, the Commissioner of
Customs (Exports) considered exports made by the the assessee at
New Delhi and Kanpur and imposed, in sum, fines of ` 18,00,000 (in
lieu of confiscation of the goods in question, under Section 125 (1) of
the Act), and penalty of ` 8,00,000/- (under Section 114 of the Act).
The Order-in-Original recorded inter alia as follows:-

“3. In terms of Exim Policy 2004-09, Chapter 4 of
Foreign Trade Policy (FTP) 2004-09, Duty Free Import
Authorization (DFIA) is issued to allow duty free import
of inputs, fuel, oil, energy sources, catalyst which are
required for production of export product. This scheme
is in force from 1st May, 2006. These Authorizations
shall be issued only for products for which Standard
Input and Output Norms (SION) have been notified. A
minimum 20% value addition shall be required for
issuances of such authorization except for items in germs
and jewelry sector. Once export obligation has been
fulfilled, requires for transferability of authorization or
inputs imported against it may be made before concerned
RA. Once, transferability is endorsed, Authorization
holder may transfer DFIA or duty free inputs, except fuel
and any other item(s) notified by DGFT. An Advance
Authorization shall specify:

(a) name and description of items to be imported and
exported/supplied.

(b) quantity of each item to be imported or wherever quantity
cannot be indicated, value of item shall be indicated.
However, if in SION, quantity and value of individual
inputs is a limiting factor, same shall be applicable.

(c) aggregate CIF value of imports; and

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(d) FOB / FOR value and quantity of exports / supplies.

4. In view of the above, in order to avail the benefits of
DFIA scheme, the Exporters were under obligation to
indicate the technical characteristics, quality,
specification and value of the essential oil used in the
manufacture of the panmasala / gutkha in their shipping
bills at the time of export and thereafter while applying
for the Duty Free Import Authorization Licenses Scheme
Under Chapter 4 of FTP 2004-09.

5. In tandem with the para 4.55.3 handbook of procedure
Vol. I (2004-09), Notifn. No. 40/2006 Customs dated
01.05.2006 also specifies the similar conditions, wherein,
if perfume/ essential oil/aromatic chemical are the inputs
of the export produce, the exporter shall give a
declaration with regard to technical characteristics,
quality and its specification in their shipping bills at the
time of export. In the light of the same, exporter is bound
to show nexus between the essential oil/perfume/aromatic
chemicals actually used in the manufacture of export
goods and the essential oil/perfume finally imported
against the said exports (i.e. the DFIA license).”

5. The Commissioner also referred to the statement of
Shri Vikram Kothari under Section 108 of the Act:-

“Further on being specifically asked that under
para 4.55.3 handbook of procedure 2004/09 and as per
the conditions specified under Notfn. No. 40/2006
Customs dated 01.05.2006, he had to declare the
technical characteristics of the Essential Oil, Perfume
and Aromatic compounds used as the input of the
resultant export products (i.e. Gutka in instant case) in
the corresponding shipping bills. He stated that the said
provision of declaring the technical characteristics of the
essential oil on the shipping bill were not followed at the
time of export neither it was declared at the time of
transferability of said DFIA Licenses to the jurisdiction

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DGFT Authorities as the same was not brought to his
notice by the Custom Authorities or DGFT Authorities.”

6. The Commissioner noticed that statements of some of the
assessee’s suppliers, recorded under Section 108 of the Act, which
stated that the products supplied to the assessee were not “natural
essential oils”, but manufactured by mixing the aroma of natural
flowers on base oils. As the documents recovered from the
Respondent included applications filed by it for DFIA Licenses in
which it had declared that its products contained “natural essential
oils” as inputs and the use of synthetic aromatic chemicals was not
declared, the Commissioner was of the view that the DFIA Licenses
were obtained by suppression and distortion of facts.

7. The Commissioner recorded the following findings:

“32.3 Thus, as per the above paras, the exporter
shall give a declaration with regard to technical
characteristics, quality and its specification of the
Perfumes/Essential Oil/ Aromatic Chemicals used in the
manufacture of the export goods (panmasala/gutkha) in
the shipping bills filed under DFIA Scheme. But exporter
did not fulfilled these conditioned. Import authorization
regarding import of essential oils is valid only after
fulfillment of said conditions.

32.4 I also find that Sh. Vikram Kothari himself
accepted that the provision of declaring the technical
characteristics of the essential oil on the shipping bill
were not followed at the time of export and in 2012
DFGT had raised a query on the same matter and issued
Show Cause Notices to his firm. I further noticed that
exporter never declared the technical characteristics in
their shipping bills and in the Appendix-23 filed before
the DDFT, Kanpur. The Appendix-23 filed by them for
the transferability of the DFIA specifically mentions the

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“Natural Essential Oils viz. Sandal wood oils, Geranium
Oils, Mint Oil, Vetiver Oil; Patchouli Oil, Kewara Oil”
as he was under impression that in the DFIA scheme, his
firm was entitled to get the duty free imports of the
constituents as mentioned in the SION norms. Further,
they had used Patchouli Oil Menthol as stabilizer to
the perfumery compounds in their export product.
Patchouli Oil Menthol are Natural Essential Oil.

xxx xxx xxx

32.6 I also noticed that the fact i.e applicability of
provisions contained 4.55.3 handbook of procedure
2U04/09 and in the light of DGFT circular No.57/2009-
14 (RE 2011) dated 06.03.2012 wherein it was
emphasized that RAs should ensure that the exporter has
given the details with regard to technical characteristics,
quantity and specifications in the application for DFIA
(as at SI. No.15 of ANF A-H) had been verified from the
Office of Jt. DGFT, Kanpur and it was observed, on the
basis of documents received DCFT, Kanpur, that DGFT,
Kanpur had issued SCNs dated 18.07.2012 to the
Exporters under Section 13 of Foreign Trade
Development Regulation (FTDR) Act, 1992 wherein,
it has been, inter-alia, alleged that the technical
characteristic, quality and specifications of the essential
oil used in the export product had not been mentioned on
the Shipping Bills in contravention or 4.55.3 handbook of
procedure 2004/09 thereby suppressing the facts from the
licensing authority while availing facility of transferable
DFIA.

32.7 In view of above, I find that M/s Kothari
Foods Fragrances has made exports under DFIA
scheme, in contravention or the provisions contained in
Para 4.55.3 handbook of procedure 2004/09 (Earlier
Para 21) and Customs Notfn. No. 40/2006 and had made

CUSAA 147/2018 Page 6 of 13
the impugned exports in violation of prohibitions
stipulated under Section 11 of FTDR Act, 1992.
Therefore, the impugned export consignments as per
Annexure-INDEL/KNP (having FOB Rs.89,51,655/-) and
Annexure-INDEL/KNP (having FOB Rs.79.87,437/-)
held liable to confiscation under Section 113(d) of
Customs Act, 1962.”

[The reference in the quoted paragraph is to the Foreign Trade
(Development Regulation) Act, 1993].

8. The assessee’s appeal before the Tribunal succeeded on an
interpretation of paragraph 4.55.3 of the HBP and the exemption
notification, holding that the requirement was that the technical
specifications of the resultant product, and not the inputs, are required
to be mentioned on the shipping documents. The Tribunal relied on its
earlier orders in the case of Global Exim vs. Commissioner 2010 (253)
ELT 417 (affirmed by the Bombay High Court in 2010 (259) ELT
A139), and Commissioner vs. Sicpa India Ltd. (2012) 279 ELT 113.
The reasoning of the Tribunal was as follows:

“11. On going through the said provisions of
notification No. 40/2006 ibid clause 1 proviso provides
that in respect of resultant products specified in para
4.55.3 of the handbook of procedures, the material
permitted in the said authorization or the duty free
authorization or the intermediate supply shall be for
technical characteristic and specification as the material
used in the said resultant product. Provided further that
in respect of said resultant product, the exporter shall
give declaration with regard to technical quality,
characteristics and specifications in the shipping bill.
The notification no. 40/2006 provides that the items

CUSAA 147/2018 Page 7 of 13
mentioned in para 4.55.3 of HBP are the resultant
products.

12. On going through the para 4.55.3, the resultant
product manufactured by the appellant is pan masala,
pan masala gutkha have no mentioned therein. The
dispute has been arose between appellant and the
Revenue is that as perfumes / essential oil are mentioned
as an item (out of 22 items mentioned) in para 4.55.3 in
respect of those items the appellant is required to give
technical characteristics, quality and specification. As
perfume/essential oil is one of the item, therefore, it is to
be seen that as per notification no. 40/2006-Cus dated
01.05.2006 whether these essential oil/perfume are
resultant product or not? Because as per notification no.
40/2006, the appellant is required to give specifications
in respect of the resultant product mentioned in para
4.5.5.3. Admittedly, the perfume/essential oil are not the
resultant product. On this understanding, no objections
were raised at the time of export and no objections were
raised by the DGFT while transferring the license.”

9. The exemption notification is issued under Section 25(1) of the
Act. It exempts materials imported into India under DFIA Licenses
from customs duty, additional duty, safeguard duty and anti-dumping
duty, subject to various conditions. These conditions include the
following:-

“(i) That the description, value and quantity of materials
imported are covered by the said authorization and the
said authorization is produced before the proper officer
of customs at the time of clearance for debit:
Provided that in respect of resultant product specified in
paragraph 4.55.3 of the Handbook of Procedure (Vol.I)
of the Foreign Trade Policy, the materials permitted in
the said authorization or a duty free import authorization

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for intermediate supply, as the case may be, shall be of
the same quality, technical characteristics and
specifications as the materials used in the said resultant
product.

Provided further that in respect of the said resultant
product the exporter shall give declaration with regard
to the quality, technical characteristic and specifications
of materials used in the shipping bill.”

10. The said condition specifically refers to Clause 4.55.3 of the
HBP which is reproduced below:-

“However in respect of the following items, the exporter
shall be required to give declaration with regard to
technical characteristics, quality and specification in the
shipping bill. The regional authority while issuing DFIA
shall mention the technical characteristics, quality and
specification in respect of such inputs.

Alloys steel including stainless steel, copper alloys,
synthetic rubber, bearings, solvent, perfumes/essential
oil, aromatic chemicals, surfactants, relevant fabrics,
marble, articles made of poly-propylene, articles made of
paper and paper board, insecticides, lead ingots, zinc
ingots, citric acid, relevant glass fibre reinforcement
(glass fibre, chopped/stranded mat, roving woven
surfacing mat), relevant synthetic resin (unsaturated
polyster resin, epoxy resin, vinyl ester resin,
hydroxyl/ethyl cellulose), Lining Material.”

11. Mr.Amit Bansal, learned counsel for the revenue, submitted
that a reading of the exemption notification and paragraph 4.55.3 of
the HBP make it clear that these declarations are required if the inputs
imported under the DFIA License are enumerated in paragraph 4.55.3.
Applying this to the present case, the revenue argues is that the
assessee was duty bound to make the requisite declarations on the
shipping bills, as its inputs perfumes/essential oils, aromatic

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chemicals) are listed in paragraph 4.55.3. Learned counsel for the
assessee, on the other hand emphasized the use of the words
“resultant product” in the exemption notification, and contended that
the declaration was required only if the items produced by using the
imported inputs are listed in paragraph 4.55.3. The Respondent’s
products (pan masala, guthka) not having been included in that list, the
Respondent’s case is that no such declaration was required.

12. This court is of the considered view that the revenue’s argument
is merited and deserves acceptance. The DFIA scheme was intended
to permit duty free import of inputs used in the manufacture of
exported goods. The licenses issued by the DGFT thereunder are
subject to the conditions stipulated in the HBP. Insofar as the license
is in respect of the products specified in paragraph 4.55.3 thereof, the
licensee is required to furnish a declaration with regard to the
technical characteristics, quality and specification in the shipping bill.

13. The revenue contended that the DFIA scheme came into force
on 01.05.2006, which is also the date on which the exemption
notification was issued. The exemption was evidently granted to
operationalize the benefits accruing under the DFIA scheme. The
condition contained in paragraph (i) of the exemption notification
must therefore be read harmoniously with the provision of the HBP to
which it expressly refers. Such an interpretation leads to the
conclusion that the “resultant product” mentioned in the two provisos
to paragraph (i), refers to the goods produced using the inputs
imported under the DFIA.

CUSAA 147/2018 Page 10 of 13

14. The rival interpretation advanced by the assessee, (and accepted
by the Tribunal) is that the declaration requirement of the exemption
notification is applicable only if the exported goods are included in the
list of items enumerated in paragraph 4.55.3. This contention cannot
be accepted.

15. The consequence of the assessee’s interpretation would render it
impossible to correlate the duty-free imports made under the DFIA,
with the inputs used in the exported products. Further, if the “resultant
products” are those enumerated in paragraph 4.55.3, then this
interpretation would require a declaration of the quality, technical
characteristics and specification of the materials used in those items.
Such a construction, in this court’s opinion, is unreasonable as the
DFIA is intended to exempt inputs used in production of other goods
in India, and is not concerned with the materials that have been used in
the production of those inputs.

16. Learned counsel for the revenue had cited Global Exim and
Sicpa India (Supra). In Global Exim, the Tribunal has taken the view
that there is contradiction between the exemption notification and
paragraph 4.55.3. On such a view, the Tribunal applied the provisions
of the notification rather than that of the HBP. Although the matter
was carried to the Bombay High Court by the Revenue, that court held
that the factual findings recorded by the Tribunal could not be
dislodged by the revenue, and therefore dismissed the appeal on the
ground that it did not raise any substantial question of law. The
decision of the Bombay High Court does not therefore turn on an
interpretation of the HBP and the exemption notification. In Sicpa

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India, the Tribunal has relied inter alia upon its earlier judgment in
Global Exim. It has also referred to the judgment of Supreme Court in
Titan Medical Systems Pvt. Ltd. Vs. Collector of Customs (2003) 9
SCC 133.

17. Titan Medical Systems is in respect of a Duty Exemption
Scheme and exemption notification. The Supreme Court has
interpreted the term “substantial manufacturing activity” in the
Scheme, and held that, in the absence of any action taken by the
licensing authority, the revenue could not rely upon any alleged fraud
and misrepresentation on the part of the assessee in obtaining licenses
under the Duty Exemption Scheme. Titan Medical Systems therefore is
authority for the proposition that the assessee’s entitlement to an
exemption, if it is otherwise eligible, cannot be denied on the basis of
alleged misconduct of the party in obtaining an import license. In the
present case, however, we have based our decision only on the
entitlement of the assessee under the notification in question.

18. In view of the above discussion, the questions of law framed are
answered in the affirmative, i.e. in favour of the revenue and against
the assessee.

19. Although arguments before this Court were confined only to the
above questions of law, learned counsel for the assessee pointed that
certain other issues had also been raised before the Tribunal, including
particularly the question of limitation which has not been decided in
the impugned order. It was therefore submitted that, in the event the
CESTAT’s order is set aside, the appeal may be remanded to the

CUSAA 147/2018 Page 12 of 13
tribunal for deciding the other issues involved, including the question
of limitation.

20. In view of the above, the appeal is allowed. The impugned
judgment of the CESTAT is set aside, and Appeal No. C/53217/2015
is restored to the file of that tribunal for disposal in accordance with
this judgment, and consideration of other issues in accordance with
law. There shall be no order as to costs.

PRATEEK JALAN, J

S. RAVINDRA BHAT, J
November 26, 2018
„pv‟

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