Chennai CESTAT Allows Duty Exemption For JSW Steel, Rules Belated Reports Cannot Override Notice

The Chennai Bench of the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) on 10 March held that customs authorities cannot deny exemption by relying on test reports that were not part of the Show Cause Notice, and that adjudication cannot travel beyond the allegations contained in the notice.

A Bench of Judicial Member P. Dinesha and Technical Member Vasa Seshagiri Rao set aside the demand raised against JSW Steel Ltd., holding that the imported coal satisfied the exemption conditions at the time of import.

The CESTAT noted:

"We observe that the impugned order, however, proceeds entirely on the basis of CIMFR's report dated 19.03.2014 which indicates CSN of 0.5 in respect of Bill of Entry No. 5919332 dated 06.02.2012. We find that paragraphs 18 to 23 of the impugned order rely substantially on this belated report. We therefore find that the decisive evidentiary foundation of the impugned order is a document not forming part of the Show Cause Notice."

The dispute arose from imports of Hard Coking Coal of Australian origin by JSW Steel through Karaikal Port between August 2011 and March 2012 for use in the manufacture of iron and steel.

JSW Steel had declared the goods as “Coking Coal” under Customs Tariff Heading 2701 19 10 and claimed exemption from Basic Customs Duty under Notification No. 21/2002-Cus. The consignments were provisionally assessed pending laboratory reports.

The Chemical Examiner at Customs House, Chennai reported a Crucible Swelling Number (CSN) above 1, one of the parameters relevant for classification as coking coal, while the Mean Reflectance (MR) value was taken from the load-port surveyor's certificate. Based on these parameters recorded in the test reports and certificates, the provisional assessments were finalised and the exemption was granted to JSW Steel.

Subsequently, the Customs Department issued a Show Cause Notice proposing denial of the exemption on the ground that MR had not been determined by a customs laboratory and that the CSN values in the load-port report were unreliable.

During adjudication, remnant samples were sent to the Central Institute of Mining and Fuel Research (CIMFR), Dhanbad, which reported a CSN value of 0.5 for one Bill of Entry.

Relying on this report, the Commissioner of Customs, Tiruchirappalli denied the exemption only for that Bill of Entry and confirmed a differential customs duty demand of Rs. 1.06 crore along with interest, while dropping proceedings for the remaining consignments.

JSW Steel then filed an appeal challenging the order before the Tribunal, contending that the adjudicating authority had relied on CIMFR reports that were never referred to in the Show Cause Notice.

After examining the records, the Tribunal observed that the Show Cause Notice contained no reference to CIMFR testing and did not allege that any subsequent scientific analysis showed that the goods failed to satisfy the exemption criteria. However, the impugned order relied heavily on the CIMFR report obtained after issuance of the notice.

The Bench held that such reliance amounted to introducing a new evidentiary foundation not forming part of the Show Cause Notice, which is impermissible in law. The Bench observed that the adjudicating authority cannot retrospectively expand or substitute the foundation of the Show Cause Notice, and that mere supply of documents during adjudication cannot substitute a proper allegation in the Show Cause Notice.

It stated: "In the present case, the Appellant has discharged such burden through contemporaneous test reports which satisfy the prescribed parameters. We find that preferring a belated test report over contemporaneous reports without demonstrating reliability of the former is arbitrary."

Therefore, the Tribunal concluded that the imported coal satisfied the conditions of the exemption notification and that the adjudication had improperly relied on evidence beyond the scope of the Show Cause Notice.

Accordingly, it set aside the order denying exemption and allowed the appeal.

For Appellant: M.S. Nagaraja, Advocate

For Respondent: O.M. Reena, Authorised Representative