Telangana High Court Upholds Gimpex's Target Plus Duty Exemption, Says Broad Nexus Sufficient

The Telangana High Court on 11 August upheld the relief granted to Gimpex Limited, holding that the extended period of limitation could not be invoked in the absence of material showing fraud, wilful misstatement or suppression of facts with an intent to evade duty.

A Division Bench comprising Justices P. Sam Koshy and Narsing Rao Nandikonda observed that a strict product-to-product nexus between imported and exported goods was not required to claim duty exemption under the Target Plus Scheme. A broad nexus between the goods was sufficient. The judges held:

“...We find no infirmity in this construction, which harmonises the expression 'broad nexus' occurring in paragraph 3.2.5 of the Handbook of Procedures with the words 'input and use' employed in the FTP itself, while at the same time not permitting the expression to be stretched so as to render the concept of nexus wholly illusory”

Gimpex Limited exported industrial minerals including iron ore, bentonite, feldspar and granite slabs. During 2004-05, it recorded exports worth approximately Rs. 173.30 crore, making it eligible for duty credit certificates under the Target Plus Scheme.

The Directorate General of Foreign Trade (DGFT) issued seven duty credit certificates to Gimpex amounting to Rs. 7.08 crore. On the strength of these certificates, Gimpex obtained Transfer Release Advices and imported continuous cast copper rods in 14 consignments between September 2006 and April 2007, valued at approximately Rs. 13.54 crore.

The company claimed exemption from basic customs duty and additional customs duty under Customs Notification No. 32/2005-Cus dated 8 April 2005. The copper rods were accordingly cleared without payment of duty.

The Directorate of Revenue Intelligence subsequently investigated the imports and issued a show-cause notice proposing denial of the exemption, recovery of customs duty and interest, and imposition of penalties.

The Customs Department alleged that the imported copper rods had no nexus with the goods exported by Gimpex and that the company had therefore wrongly availed the Target Plus Scheme benefit. It contended that the Scheme required a strict nexus between the imported goods and the specific goods exported by the company. It argued that copper rods, which were used for wire drawing, could not be treated as inputs connected with the iron ore, bentonite and other minerals exported by Gimpex.

Gimpex, on the other hand, submitted that the policy required only a “broad nexus” and not a one-to-one relationship between the imported and exported goods.

The High Court accepted Gimpex's interpretation and held that a strict product-to-product nexus was not necessary. It held that the requirement was satisfied where the imported goods could be used as inputs in the manufacture of goods falling within the same defined product group specified in the Target Plus certificate.

It observed that this interpretation harmonised the expression “broad nexus” in paragraph 3.2.5 of the Handbook of Procedures with the requirement of “input and use” under the Foreign Trade Policy, without rendering the nexus requirement meaningless.

The Bench, however, clarified that the benefit could not be extended automatically to all exported goods. On the facts of the case, it found a broad nexus between the imported copper rods and the iron ore fines exported by Gimpex under the Engineering Products group. It found no such nexus with bentonite and similar products falling under the Chemicals and Allied Products group.

It also held that the extended period of limitation could not be invoked where the policy was ambiguous and the taxpayer had proceeded on an interpretation that had also received judicial acceptance. In such circumstances, it could not be concluded that the taxpayer had acted with an intent to evade payment of duty.

Further, the judges noted that the duty credit certificates issued by the DGFT had not been shown to have been obtained through fraud or clandestine means and had never been revoked, cancelled or amended by the DGFT. They observed:

“..the interpretation on which the GL had proceeded and claimed the benefit of the Notification, it cannot be said that the GL acted with the intent to evade payment of duty..,”

The Bench also held that Gimpex's establishment of a unit to utilise the Target Plus Scheme certificates or its supply of the imported copper to other importers at a discounted price did not, by itself, establish fraud, collusion, wilful misstatement or suppression of facts.

It found no reason to interfere with the relief granted to Gimpex and answered the questions of law against the Customs Department and in favour of the company.

Accordingly, the High Court dismissed all the three appeals and upheld the relief granted to Gimpex Limited and Sree Enterprises.

For the Appellant: Ms. B. Sapna Reddy, Senior Standing Counsel for CBIC

For the Respondent: Mr. B. Satish Sundar, counsel appearing on behalf of Mr. Parikshith Kutur