ORDER
Gowri Shankar, Member (T)
1. This appeal is against the order of the Collector of Customs, Kandla. The respondent is a licensed unit in the Kandla Free Trade Zone (for short Zone) authorised for manufacture of cold rolled closed annealed and tin mill black plate coils by the Ministry of Commerce in accordance with the provisions of paragraph 8 of Chapter 3 of the Import Export Policy for 1983-84. The Ministry of Commerce permitted it to import subject to the conditions specified in the permission, one each of the following items:
(a) Temper mill
(b) 4-Hi reversing cold reduction mill
(c) Continuos pickle line (terminal equipment only)
(d) Bright annealing furnace facility
(e) Reconditioned, second hand cylindrical roll grinding machineries.
2. On examination of the imported goods of which clearance was claimed in terms of this letter, the department found that the thyristor converter system, one complete furnace used and new raw materials and components for fabricating three more furnaces were imported. The Collector’s order records that the first item was imported in place of a motor generator set permitted for the temper mill and the second in place of bright annealing furnace. Notice was issued proposing confiscation of these goods Under Clause (d) of the Section 111 of the Act and penalty be imposed Under Section 112 and recovery of duty, proposing to deny the exemption Under Notification 77/80. After hearing the importer the Collector passed the order impugned in the appeal. He states that the thyristor converter system was imported as a part of the temper mill, except for this system all the other components of the temper mill which was imported were second-hand. Value of the thyristor converter was only 9% of the total value of the temper mill. A second-hand machine, which was reconditioned, may necessarily have new parts to allow the machine to perform its intended functions. The machine could not be held to be new only because some component parts of it were new. Therefore, he said that the respondent imported “as a whole” a second hand temper mill covered by the licence. He noted that the Development Commissioner, Kandla Free Trade Zone, permitted clearance of the converter for export production and, therefore, extended the benefit of Notification 77/80.
3. The Collector found the material imported in place of the bright annealing furnace facility have the following:
Furnace assembly; cleaning line equipment; base blower motors; convector plates; control panels and process controller; floor plates, angle bars and skid rails; special steel plates, pinhole detector, studs, washers, cones, reels and miscellaneous parts; ceramic wool.
4. The first six items were old and these old components were cut to size and the seventh and eighth were new raw material in running length. He found that the ceramic wool was advanced type of refractory material used to line inside of the furnace. He found to be it common knowledge that such wool once cut and used as lining could not be re-used and, therefore, concluded that such wool could only to be imported as raw material. He found that the steel plates were to be fabricated at site to make as parts for the furnace. He was of the view that Notification 77/80 covered import of these goods in view of its scope, and the fact that the furnace after fabrication remained in the zone and was used for export production. He did not consider it necessary to order confiscation of the goods or impose penalty. Hence this appeal.
5. We have heard the departmental representative. The Advocate for the respondent stated that the respondent had not been supplied with the documents referred to in the department’s appeal. The departmental representative made it clear that he was not relying on any of the document and referred only to the issues involved in the appeal. On this being pointed out to the Advocate for the appellant he, however, very forcefully stated that Rs. 5 crores duty was involved and that he had nothing further to say.
6. We must first of all note that the department’s appeal does not refer to any document that could not be in the respondent’s possession. The appeal does not cite or refer to any documents other than the ones that notice was based on or the Collector has considered in his order. The documents referred to as supporting documents to the appeal consist of various letters of the respondent to the Customs Department, Reserve Bank of India and other Banks, Development Commissioner of Kandla Free Trade Zone, correspondence between the respondent and the Customs authorities. Every one of these documents has been in the respondent’s possession. They would in any event have been supplied, with the notice, or access to them provided at that stage. The respondent had not raised any plea at any stage that such documents or copies thereof had not been provided. The department’s appeal was adjourned twice earlier, at the respondent’s instance, and this plea had not been raised widest latitude. It is not really possible to say that these documents were not made available to the respondent. We are therefore unable to accept the reason put forward, to be a valid reason for the respondent’s Advocate to refrain from arguing on the points involved.
7. The grounds in the appeals are these : the import of the thyristor converter was not permitted by the letter of Ministry of Commerce, permitting import and the raw material for setting up annealing furnace was not covered by the letter of approval of the Ministry of Commerce and, therefore, was in contravention of the Import Policy and hence not entitled to the benefit of Notification 77/80. The approval of the Ministry of Commerce was granted on the application made by the respondent which specify motor generating system. The Collector was therefore in error in substitute in vogue the thyristor converter system for the motor generator set. The benefit of Notification 77/80 could not be extended to capital goods for setting up a factory. The notification has to be construed strictly and, therefore, there is no scope for reading meaning into it as to its intended scope. The Collector did not take into account the advice rendered by the department to the respondent to obtain approval from the Board.
8. Notification 77/80, as it stood at the relevant time, provided for exemption from duty on the goods specified in the annexure to it; subject to various conditions specified therein. Among these conditions are that the importer had been granted a necessary licence for the import of the goods, and that the importer shall fulfil the export obligations and the conditions stipulated in the notification and in the Export Policy for April 1985 to March, 1988 as amended. The annexure to notification extended inter alia its scope spare parts of machinery, raw material and components.
9. In terms of paragraph 54 of the Policy, Appendix 23 of the policy book laid down the procedure for import of capital goods by any unit located in a Free Trade Zone and by 100% export oriented unit. This appendix provided that only industrial unit approved by the Board, set up by the Cabinet Committee for this purpose would be eligible for import of capital goods, raw material, etc. (paragraph 3), it also provided that while applying for licence, the applicant would furnish a list of items including capital goods that it would need to import and raw material components, spares required for a 12 month period. Capital goods were to be imported within 2 years from the date of letter of approval and for additional requirements over that permitted initially, the unit will have to apply afresh to the Board (paragraph 43). Specific approval is required even in respect of items placed under OGL under the normal policy (paragraph 4J).
10. It is clear from these provisions that import of capital goods, raw material or components or other goods required by an unit in the Kandla Free Trade Zone would need prior approval of the Board set up for this purpose. The benefit of notification would also be available only if the import was made under a licence for the import of goods. The licence as is evident from the policy, is the permission granted by the Kandla Free Trade Zone Board.
11. The question now to be considered is whether the goods in dispute are covered by permission granted by the Board. Let us consider each of the items. The thyristor converter was new. It does not figure among the 5 items that were permitted by the Board to be imported by the respondent. The importer’s contention was that the converter is part of the motor generator set, which is one of the unit of the temper mill permitted to be imported. The Collector records that the motor generating set comprising of 2AC motors, 2DC generators and the current balancing generator were imported, and were only part of items required for making complete motor generator set. The Collector says that he had seen the motor genertor set in the appellant’s factory and finds that motor generating set was incomplete and that the imported items forms only 20% of these items. He finds that the thyristor converter systems is a part of the temper mill. He agrees that it is new, whereas what was permitted is import of old temper mill. He finds that the value of the converter is only 9% of the value of the temper mill. His reasoning is that a second-hand machine, which is reconditioned, may have some new parts to enable the machine to perform its functions. Such a machine, he says, cannot cease to be a secondhand machine only because some of the components are new. He has therefore held the thyristor converter to be covered by the licence.
12. We do not find the reasoning in the order of the Collector to be sufficient to impel us to accept his conclusion that the thyristor converter was nothing other than a motor generating system. The discussions in the Collector’s order about the motor generating system that it forms to be part of temper mill, being incomplete, do not appear to be based on any technical evidence. While he refers to the inspection report of M/s. Dona Electricals, he does not cited how it supports his conclusion. On consideration of the documents it is not possible for us to hold that these thyristor converter was specified by the importer in its application for approval considered by the Board and its import permitted. The fact relied upon by the Collector, that the Development Commissioner of that zone has recommended clearance in terms of notification is no answer. The policy (and therefore the notification) requires the import to be authorised not by the Development Commissioner but by the Board. It is well settled law that the notification has to be construed strictly. We are unable to fine any provisions in the policy from which it could concluded that the Development Commissioner is empowered or authorised, or explained import of any goods by an unit in the free trade zone, or to explain or clarify the permission granted by the Board for such import.
13. The other fact also remains that thyristor converter was new. The Collector’s arguments that a second-hand machine does not cease to be second hand merely because it may contain a few new parts; is, in the context of these goods, ingenuous. The converter was not merely a small part or items of a large machinery. It was apparently a sophisticated assembly, exemption valued at Rs. 30 lakhs GIF. A temper mill itself would be an assembly of number of machines or sets of machines, to perform its functions. A thyristor converter is evidently one of these assemblies of machine or equipment. It is too (sic) be simplistic to compare this, in relation to the temper mill as a small part, like the tyres of a car. It has therefore to be held that the thyristor converter was not imported according to the licence. It is hence liable to confiscation and the benefit of notification is not available to it.
14. We are next concerned with the raw material for components of the bright annealing furnace. Here, the Collector holds that ceramic wool, was an advanced refractory material used to align the inside of the furnace, insulated against heat loss. It has only a life of 5 years and one cannot expect anyone to use used ceramic wool. In any case, it cannot be re-used once it cut in appropriate lining. Therefore, he says the ceramic wool can be imported only as a raw material. There is no specific allegation with regard to ceramic wool in the appeal. The appeal generally urges that the goods were not in the list approved by the Board.
15. However, if, as found by the Collector, the ceramic wool could not be imported except as unused, this fact would have been obvious to the importer and would have been brought to the notice of the Board. This has not been done, and Board, equally, would, in that case have permitted its import. The appellant did not ask for import of such new wool. Accepting the logic behind the Collector’s conclusion the failure to import the goods under a licence can be condoned, however, the goods would even in that case not eligible for the benefit of notification, since one of the conditions in the notification that a licence is required is not complied with. Therefore, we do not find it fit to order confiscation of the ceramic wool, it would not be entitled to benefit of the notification.
16. The Collector has held that the special steel plate is a new raw material in running length. Now he agrees that the special steel plates weighing about 11 M.T. are to be subject to cutting, shaping and fabrication at site for making the inner cover for the cylindrical shape for the furnace. Therefore, they have to be treated as raw material for fabrication of capital goods. He finds that the notification is to take care of all the importer’s requirements, including the capital goods requirements, for export production. He says the fact that the unit has imported these items for the manufacture of new furnaces rather than importing second-hand furnaces permitted to be imported justifies the demand. He, however, finds that Notification 77/80 will also apply to goods which are imported “for being used in connection with the production of packing of the goods for export”. According to him these words would include any raw materials and components imported for assembling capital goods, which may be used for production of export goods.
17. The notification grants exemption to goods specified in the annexure to the notification “when imported into India for the production of goods for export out of India or for being used in connection with the production or packaging of goods for export out of India or for the promotion of such exports by units within the zone”. The goods listed in the annexure are machinery, raw material, components, spare parts of machinery, consumables, packaging materials, office equipments, spares and consumables thereof, and goods re-imported within one year from the date of exportation from the zone due to the failure of the foreign buyer to take delivery or for repairs, tools, jigs, gauges, fixtures, moulds, dies, instruments and accessories, prototypes, technical and trade samples for development and diversification; and drawings, blue prints and charts.
18. We do not find it possible to hold that the term of the notification would include raw material to be used for fabricating machinery, which in turn will be used in the zone. The phrase “for being used in connection with the production” has to be read alongwith the other two phrases in company it is found. The phrase lots deals with the machinery, apparatus and raw material directly used to manufacture the goods exported. The second defines to those which, while they may not be directly required for such production, may be used to fulfil functions auxiliary to such production and also packaging – that is to say, stages anterior and subsequent to the direct manufacture of the goods. This phrase therefore would thus cover such goods such as material handling equipments, machinery for processing of intermediate products, etc., directly required for producing the export goods may be indispensable as parts of the plant, required to product such goods. It is however, a very different thing to say that the goods, which after fabrication constitute machinery to be used for producing the export goods, are themselves goods which are used in connection with the production. Accepting this logic would lead to a situation where raw material or component for the manufacture of goods which in turn are used to set up machinery, used to make the components required by the unit would be allowed to be imported. The annexure to the notification is illuminating in this regard. The specified machinery and spare parts of machinery, but not raw materials or components for the manufacture of such machinery or part. The extended meaning sought to be given to the words is therefore neither supported by the words in the notification nor by the list of goods in the annexed to it. Further, the Collector also has omitted to consider one significant fact that not being mentioned in the list of goods which were approved, the import of the goods was unauthorised and would to held liable to confiscation. Therefore, apart from anything else the condition in the notification that their import must be in accordance with the licence has not been satisfied.
19. We have to note that endorsing the manner in which the Collector has dealt with the matter would render unnecessary and redundant procedures specified in the policy that approval is to be granted by the Board for imports to be made. Accepting his logic it would follow that anything that a unit in the zone brings in the factory, which is indirectly required for use in connection with the export of goods could be permitted for import duty free irrespective of whether its import was subsequently permitted by the Board or not. This clearly is not the intention either in the policy or the notification as they then existed. It has therefore to be held that, benefit of notification would not be available to any of these goods and that barring the ceramic wool all other goods are liable to confiscation Under Clause (d) of Section 111.
20. The Collector did not have occasion in view of the fact to consider the liability of the respondent to penalty since he did not find the import as unauthorised. We also do not have, before us enough material to determine the amount of redemption fine and also consider it necessary to send it back to the Commissioner for considering these aspects based on the material before him. For this limited purpose we remand the matter back to Commissioner. He shall adjudicate on this in accordance with law.
21. Appeal allowed.