No Customs Interest On Capital Goods Kept In Bonded Warehouse Until Clearance: Rajasthan High Court

The Rajasthan High Court has upheld the setting aside of a ₹2.88-crore customs interest demand on solar modules imported by Acme Aklera Power Technology Pvt. Ltd.

It held that interest under Section 61(2) of the Customs Act cannot be charged on capital goods covered by Section 61(1)(a).

A Division Bench comprising Justice Arun Monga and Justice Ashutosh Kumar held that such capital goods can remain in a warehouse until clearance if they are intended for use in a warehouse where manufacture or other operations are permitted under Section 65. The Court said no fixed period applies to such goods for triggering interest.

The company had imported capital goods, namely solar modules, under the Manufacture and Other Operations in Warehouse Regulations, 2019 (MOOWR, 2019). The goods were deposited in its customs bonded warehouse, which was licensed under Section 58 and permitted for manufacture and other operations under Section 65.

The Customs Division, Barmer, reported that only 1,379 out of 7,728 solar modules covered by the relevant 10 ex-bond Bills of Entry had been installed. The remaining modules were lying at the project site in the same condition in which they had been imported.

The Department therefore took the view that interest was payable on the customs duty relatable to the modules that had not been installed. It relied on Section 61(2) of the Customs Act and paragraph 12 of CBIC Circular No. 34/2019 dated October 1, 2019.

The Assistant Commissioner of Customs, Jodhpur, subsequently held that interest of ₹2,88,17,955 was payable under Section 61(2). The Commissioner (Appeals), however, set aside the assessment order, and the CESTAT later dismissed the Department's appeal.

The Department then approached the High Court. It argued that Section 68 required payment of import duty, interest, fine and penalties, as applicable, before warehoused goods could be cleared for home consumption.

The Department also relied on Section 61 and the CBIC circular. It contended that goods remaining in the warehouse beyond 90 days attracted interest.

It further argued that the solar modules which had not been installed should be treated as goods covered by Section 61(1)(c). According to the Department, the Tribunal had erred in holding that the mere intention to use the goods was sufficient to bring them within Section 61(1)(a).

The High Court examined Section 61 as substituted by the Finance Act, 2016 with effect from May 14, 2016. It noted that the amended Section 61(1)(a) allows capital goods intended for use in a warehouse where manufacture or other operations are permitted under Section 65 to remain there until their clearance.

The Court contrasted this with Section 61(1)(c), which covers the residuary category of goods. A fixed period of one year applies to goods under that clause. The 90-day interest trigger under Section 61(2) also applies only to such goods.

The Bench therefore held that the 90-day period under Section 61(2) could not be applied to capital goods falling under Section 61(1)(a). For such goods, there is no prescribed period whose expiry could trigger interest.

The Court found that three facts were undisputed. The goods were capital goods, namely solar modules meant for setting up a solar power plant. The respondent's warehouse was licensed under Section 58 and permitted for manufacture and other operations under Section 65.

The goods had also been deposited in that very warehouse. The Court held that they therefore answered the description in amended Section 61(1)(a).

The Bench further held that the goods could not be shifted to the residuary category merely because some of them were ultimately not installed. Section 61(1)(a) uses the expression “intended for use”, rather than “actually used”.

The Court said the relevant intention had to be assessed at the time of import and warehousing. It could not be judged retrospectively based on subsequent events.

On the facts, the Court relied on the concurrent findings of the Commissioner (Appeals) and the CESTAT. The respondent had imported 8,37,288 solar modules for the project between September 2022 and October 2023.

Only 48,742 modules, representing 5.82% of the total imports, could not be installed. The Court noted that this resulted from a subsequent change in the project's design and layout, as well as insufficient land to accommodate the mounting structures.

The respondent eventually ex-bonded those modules after paying the applicable customs duty. The Court held that these circumstances established that the modules had been intended for use in the project when they were imported and warehoused.

The Bench consequently held that the goods fell squarely under the amended Section 61(1)(a). It said Section 61(2) contains a charge of interest only in respect of goods covered by Section 61(1)(c).

The Court further observed that there was no substantive charging provision for interest on goods falling under Section 61(1)(a). It held that interest, like tax, must be imposed through clear and unambiguous statutory language.

“The amended Section 61(2) charges interest only on clause (c) goods. There is no charging provision for interest on clause (a) goods. Interest, like tax, must be levied by clear and unambiguous words. In the absence of a substantive charge, no interest can be demanded.”, the court ruled.

The Court also considered CBIC Circular No. 34/2019. It held that paragraph 12 dealt with goods that could be cleared “as such” from a warehouse having the dual character of a Section 58 and Section 65 warehouse.

According to the Bench, the expression “as such” referred to goods cleared in the same form in which they were warehoused. Such goods had not been subjected to manufacturing or other operations under Section 65 and fell within the residuary category under Section 61(1)(c).

The Court also rejected the Department's interpretation of the circular. It observed that a circular issued under Section 151A is an administrative instrument that binds departmental officers. It does not bind the High Court in exercise of its writ jurisdiction.

The Bench added that a circular contrary to a statutory provision cannot whittle down, supplant or travel beyond the statutory provision it seeks to explain.

The Court acknowledged the Department's argument that its interpretation could allow capital goods to remain warehoused indefinitely without payment of interest. However, it held that this was a policy choice consciously made by Parliament.

The Court noted that duty on Section 61(1)(a) goods remains deferred until clearance. It said the duty stands fully secured because it becomes payable in full at the time of clearance.

The Bench also distinguished the Supreme Court decisions relied upon by the Department, including Pratibha Processors, Kesoram Rayon and SBEC Sugar. It noted that those cases concerned the unamended Section 61, under which all categories of warehoused goods were subject to fixed warehousing periods.

The High Court held that the foundation of those decisions was absent under the amended Section 61. Capital goods covered by clause (a) can remain in a Section 65 warehouse until their clearance.

The Court also noted that the company had paid the entire applicable customs duty. It held that the Revenue had suffered no loss of duty.

Holding that the amended statutory scheme did not support the Department's interest demand, the Court declined to interfere with the concurrent findings of the Commissioner (Appeals) and the CESTAT.

The Bench further held that the questions raised by the Department were, in substance, questions of fact. It concluded that no substantial question of law arose.

The High Court accordingly dismissed the Customs Department's appeal. It upheld the CESTAT's order dated July 30, 2024, which had set aside the ₹2.88-crore customs interest demand.

For Appellant: Akshay Bhardwaj with Anand Singh

For Respondent: Mannat Waraich, Ananya Goswami and Vidhi Maheshwari, Advocates