Duty-Free Import Benefits Denied Over Unauthorised Diversion, Poor Record-Keeping: Madras High Court

The Madras High Court on 10 February, held that duty-free import benefits under the Advance Authorisation Scheme can be denied when the importer diverts the goods into the domestic market without authorisation.

A Bench of Justice G.K. Ilanthiraiyan and Justice R. Poornima allowed the Department's appeals, arising from a batch of civil miscellaneous appeals filed by the Commissioner of Customs (Department) against the proprietor of Regin Agency, and Regin Exports.

Setting aside the CESTAT's order, the Bench concluded:

"The order of the Tribunal is therefore improper, perverse, and liable to be set aside. Mere non-tallying of the total quantity of goods imported by the respondents with the materials seized does not vitiate the investigation, especially when the respondents, who were expected to furnish the necessary particulars, failed to do so."

The dispute arose from imports of raw cashew nuts in 2016 under seven Advance Authorisation Licences issued by the DGFT. It permitted duty-free imports subject to fulfilment of export obligations and compliance with the “actual user” condition, which required the goods to be processed in the importer's authorised premises.

The Department alleged that large quantities of imported raw cashew nuts were diverted to unauthorised units via Regin Agency for processing and domestic sale in violation of Notification No. 18/2015-Cus and the Foreign Trade Policy 2015-2020.

Based on statements from the importer, job-workers, transporters, and buyers, the Commissioner of Customs confirmed a duty demand of approximately Rs. 2.71 crore, ordered confiscation of goods, and imposed penalties on the importer as well as intermediaries.

Before the Tribunal, Regin Exports, contended that the export obligations under the Advance Authorisations had not expired on the date of issuance of the show cause notice and were subsequently fulfilled in full. They argued that job work through multiple units was a recognised industry practice in the cashew trade and that the Department failed to establish that the goods allegedly sold in the domestic market were traceable to the duty-free imports.

The CESTAT accepted the importer's submissions and held that mere movement of goods to job workers or procedural deviations could not, by themselves, establish diversion or misuse of duty-free imports, particularly when export obligations were ultimately met.

The High Court, however, observed that "the respondents have not produced any document to establish under what authority the cashew nuts were sent for processing to various agencies through M/s. Regin Agency, nor have they shown on what authority M/s. Regin Agency managed its affairs without any authorisation or permission from the competent authority."

The Bench noted that although Regin Agency claimed that the goods sold by them were not the imported goods but were allegedly purchased from some other local agency, no documentary proof whatsoever was produced to substantiate such purchases.

The Court further pointed out that no records were produced to show the exact details of diversion, the locations where processing was carried out, or the payments made for such processing. It held:

"No registers were maintained except a daily stock register, which itself did not tally with the quantity of goods imported through the port under the Advance Authorisation."

Accordingly, the Department's appeals against Regin Agency, and Regin Exports were allowed, while other appeals in the batch (involving Customs brokers and third-party buyers) were dismissed on merits for lack of evidence of connivance to evade revenue.

For Appellant: Advocate, N.Dilip Kumar

For Respondent: Senior Counsel, Isaac Mohanlal