ORDER
R. Jayaraman, Member (T)
1. This is an appeal against the Order-in-Original No. SG-4/85/S/10-45/85 SIIB, dated 10-8-1987 passed by the Collector of Customs, Bombay.
2.1 In the said order, the Collector held that 4200 sets of Baby Beds sought to be exported under three Shipping Bills as liable to confiscation. The goods were sought to be exported with declaration that the goods are exported against DEEC scheme in respect of which they have applied for DEEC licence. As per policy provisions, goods can be exported in advance in fulfilment of export obligation, which may be specified in the licence. The description of export goods was declared to be “Baby bed sets made of 100% polyester with upholstery of cotton fabric” giving the weight of polyester content in each piece in the set. On examination of the goods, the examining officer has reported that fibre stuffed in the pieces comprising the set was found to be polyester soft waste as against the declaration in the S/B as polyester fibre (100% polyester).
2.2 Samples were drawn and sent for chemical test. In the test reports received from the Dy. Chief Chemist, it is reported – “each of the five samples is made of woven and printed cotton fabric cover and polyester fibre stuffed inside.” Thereafter, a query memo was sent to the Dy. Chief Chemist raising the following questions :
(i) Whether the samples are containing polyester fibre or polyester waste or otherwise.
(ii) If the samples are found to be polyester fibre, the fibre specifications viz. Denier, Staple length etc. may be indicated.
In response to the query raised by the assessing officers, Dy. Chief Chemist replied as below with reference to the samples –
“The polyester fibres are in general found to be of varying length. There are fibre groups of different shades, white, dull white etc. some of them being coiled. Some samples also indicate the presence of entangled mass of filament yarn including texturised yarn…The above findings are indicative of material being waste. It is not possible for the laboratory to state denier, staple length of polyester fibres”.
2.3 Thereafter, the mill premises were searched by officers of SUB and a statement of the General Manager was recorded under Section 108 of the Customs Act. He has stated that they are using polyester fibre waste in the manufacturing of beds for export under DEEC scheme. Polyester fibre is obtained from local market. The fibre so obtained is used in their spinning mill. Whatever is left over plus mixed polyester fibre waste without any fibre specification is used in the manufacture of Baby Beds for export. They have not kept any separate record of polyester fibre and polyester fibre waste to establish the exact allocation of consumption of prime polyester fibre in the export product. He also indicated that they will make necessary application for amending the description of exempt material as polyester fibre waste as against polyester fibre as declared in their application for DEEC licence, made to the licensing authorities.
2.4 Pending adjudication, the goods were allowed shipment against Bank guarantee.
2.5 Thereafter adjudication proceedings were held by the Collector, in which it was alleged that whereas the appellants had in their application for DEEC licence declared the exempt material “polyester fibre -1-5 Den 38-55MM” of Baby beds. For fulfilling the export obligation towards the licence, they have declared the beds to be polyester fibre (100% polyester). Investigations conducted, on the basis of technical opinion seem to indicate that the material stuffed is polyester waste. Hence there is a misdeclaration of the export consignment covered by the S/Bs. The Collector upheld these allegations and held the goods liable to confiscation under Section 115(i) & (d) of the Customs Act. He also held that had the consignment been cleared under DEEC scheme, there would have been duty evasion on the imported polyester fibre, on account of price difference and difference in the rates of duty. Hence he held that the obligation for export against advance licence to be issued to them will have to be fulfilled separately and would not be fulfilled by these three S/Bs. He also imposed a penalty of Rs. 16 lakhs under Section 114 of the Customs Act and ordered recovery of the penalty by encashing the Bank Guarantee, furnished earlier by the appellants.
2.6 The present appeal is against the above order.
3. The main tenets of Shri Lodha’s arguments on behalf of the appellants can be summed up as below :
(i) Referring to Appendix 19, outlining the Duty exemption scheme, he points out that the scheme is available to export products, where there is a minimum of 25% value addition.
(ii) Referring to the application for licence under DEEC scheme, he points out that value addition shown is indicated as 53.94% in terms of U.S. dollar.
(iii) Referring to the purchase order placed by the foreign buyers, he points out that it is for 19000 baby bed sets to be made of 100% polyester with upholstery of cotton printed fabric, with a condition that the goods should conform to the sample submitted by them.
(iv) The goods, in dispute, have been exported on bank guarantee and there is no dispute raised by the foreign buyer that the baby bed sets are not conforming to the samples or they are not polyester fibre stuffed. The buyers are satisfied with the goods. He refers to their letter in this regard.
(v) Refering to the original test reports of Dy. C.C. he points out that all the three reports clearly indicate that the material stuffed is only polyester fibre. Presence of no other fibre is reported. Even in the technical opinion tendered by him in reply to query memo, this position is not changed. Dy. C.C.’s technical point on noticing presence of some entangled mass of filament yarn and they, being of different shades and varying length to the effect that it is indicative of waste, cannot be a valid ground for alleging misdeclaration especially viewed in the context of their General Manager’s statemerit that they are purchasing polyester fibre from the open market, which they use partly in their spinning mills and left over of such market purchase is used in the making of beds mixed with some waste. It cannot be held that the entire material is. some extraneous material not declared.
(vi) Even in the case of waste mixed, it is garnetted. Such garnetting has been held to bring out only fibre as held by the Govt. of India in the case of British India Corporation – 1982 (10) E.L.T. 686 (G.O.I.)
(vii) Referring to the meaning given to polyester fibre given the McGraw Hill dictionary and condensed chemical dictionary, he pleads that the material stuffed conforms to the meaning given in these dictionaries.
(viii) Judged by all these factors, there is no misdeclaration as alleged, which can render the goods liable to confiscation.
(ix) He submits that without any suggestion in the S.C.N., the Collector cannot order that exports of the goods under these S/Bs will not be taken as fulfilment of export obligation towards the advance licence.
(x) He also refers to their letter dated 6-5-1985 (after the detection of the case) to the licensing authority bringing to their notice that they are not stuffing prime quality fibre and hence left it open to the licensing authority to make any alternation. On the basis of their letter, the licensing authority merely amended the denier from 1.2 to 1.4 den. Hence there was no mala fides on their part warranting imposition of penalty.
4. Heard Shri Puri, the ld. D.R. on behalf of the Collector. His arguments can be summed up as below :
(i) The charge of misdeclaration has to be judged in the context of their declaration to the effect that they are exporting these consignments towards fulfilment of the export obligation in respect of the licence, that will be issued to them, based on their application for the DEEC licence.
(ii) The application as well as the purchase order clearly state that the beds are to be stuffed with 100% polyester fibre and not with such fibre mixed with waste or with waste garnetted.
(iii) By exporting beds stuffed with waste of polyester fibre, they are claiming as duty free replenishment material – an item, namely 100% polyester fibre, carrying higher price and also attracting higher rate of duty.
(iv) DEEC scheme seeks to permit import of materials required for manufacture of export goods duty free. When they are using polyester waste in the beds, their declaration on the S/B should have been so and even in their application for licence, it should have been indicated.
(v) Even in their letter dated 6-5-1985 to the licensing authority they have not made a whisper about stuffing the beds with polyester waste, whereas the General Manager, in his statement dated 28-1-1985, has stated that they would make necessary application to J.C.C.I.E. for necessary amendment to DEEC book to amend the description of exempt material as polyester fibre-mix waste. They in their letter dated 6-5-1995 have merely indicated that they are not getting the polyester fibre directly from manufacturers but from the open market, which is not of prime quality. Thus, even in the letter, they have not revealed the true composition.
(vi) Even waste of polyester fibre, on test can be found to be polyester only. It is not their allegation of the department that the material consists of a mixture of different fibres such as acrylic, nylon etc. The allegation of the department is that it contains polyester waste and not 100% polyester fibre, as declared.
(vii) The chemical test reports are to be viewed in the above context. When examination revealed the Content to be soft waste, specific query has to be raised to Dy. C.C., which has been answered confirming the examination report. This fact is also not disputed in the statement of General Manager. Hence, there is a positive mis-declaration, attracting penal consequence.
(viii) When the goods are sought to be exported with a declaration that the exports are made in fulfilment of export obligation towards the licence to be obtained and when the goods are found to be otherwise, the officer adjudicating the allegation of misdeclaration has to decide on the acceptance of this declaration. Hence his order disallowing logging of these exports towards export obligation is a natural consequence and is not required to be specifically referred to in the Show Cause Notice.
5. Shri Lodha, in reply, stated that it is not as though the entire material is polyester waste. They have purchased polyester fibre from the open market, part of which is used for spinning and left over used for making beds. The G.M.’s statement reveals this. Adjudication proceedings, being penal in nature, are quasi-criminal proceedings. Hence the burden is entirely on the department to establish that the beds are not made of polyester fibre. He refers to the judgment of Supreme Court in Ambalal v. UOI reported in A.I.R. 1961 SC 264.
6.1 After hearing both the sides, we find that the main questions to be decided in this appeal are –
(i) whether there is a misdeclaration of the three export consignments rendering them liable to confiscation;
(ii) consequently whether the S/Bs could be allowed to be taken into account for purpose of fulfilling export obligation towards the DEEC licence to be issued; and
(iii) whether the penalty of Rs. 16 lakhs under Section 114 of the Customs Act is justified.
6.2 The arguments of Shri Lodha, on the face of it, appear very attractive and would have found acceptance, if the export is not under DEEC scheme. The main tenet of his arguments is that test report and even the technical opinion of Dy. C.C. state that it is polyester fibre. Hence there is no misdeclaration. If the shipment is sought to be done without a declaration concerning export obligation under DEEC scheme, such a plea would be quite effective. Here in this case, goods are sought to be exported under two declarations – one is description of the material stuffed as 100% polyester fibre and the other is that the goods are being exported towards the fulfilment of export obligation against the DEEC licence that will be issued to them, for which they have made the application.
6.3 Hence the matter has to be viewed in the context of that declaration concerning fulfilment of export obligation as also in the light of the application made for duty free import of replenishment material contained in the export goods. This is what we propose to do in the succeeding para.
6.4 They have declared on the S/Bs that the beds are made of 100% polyester with upholstery of cotton printed fabric. In their application for licence, they have indicated 100% polyester fibre as exempt material to be used in the export product. It is not the case of the department that the material is acrylic or nylon or cellulosic fibre. The allegation is that it is polyester waste. Hence reference to the meaning of ‘polyester fibre’ given in McGraw Hill or Chemical dictionary or Fairchild dictionary will not be of any use, since even polyester waste would only be polyester based and not nylon based or acrylic based or cotton waste to draw a distinction. The question to be considered therefore gets restricted to whether the material found in the beds is polyester fibre or polyester waste and whether these technical books make any distinction between the two.
6.5 Now we have a look at the first test report. They merely indicate polyester fibre. When the officers made a specific query, based on the examination report, it is reported by the Dy. C.C. that the material being of different length and different shades containing entangle mass of filament yarn is indicative of waste. However in fairness to the appellants we are to observe that the technical opinion does not bring out clearly that the entire material is composed of only waste. The report states that it is indicative of waste. Hence it could be waste mixed with fibre, as claimed by the General Manager in his statement. This statement is not disputed by either side. Going by this statement, we observe that the appellants were buying polyester fibre from the open market and after using such fibre for spinning in their spinning plant, left over plus mixed waste was used for the manufacture of beds. However no records of consumption of material for the manufacture of beds is maintained by them. In the context of this statement, it would appear to us that they have used left over fibre purchased from the open market plus polyester waste. What is the percentage of waste mixed is not indicated either in the statement nor the books of accounts showing consumption of polyester fibre and waste in the manufacture of beds is available. Hence viewed in the context of examination report, technical opinion of Dy. Chief Chemist and the statement of Genera] Manager, we are to hold that the material contained in the beds is not 100% polyester fibre, but it is a mixer of fibre plus waste, the percentage of waste not being clearly discernable.
6.6 It was pleaded by Shri Lodha that as against the minimum requirement of 25% value addition, their export product gets 53%. It may be so. For considering issue of DEEC licence 25% minimum value addition is prescribed under the scheme. But that scheme does not allow any material to be imported duty free other than the one used in the export product, if value addition is more than 25%. They cannot use polyester waste and claim duty free import of fibre. It is nowhere stated in Appendix 19 that if value addition is more, they can import any material of the species namely fibre. It does not authorise them to import fibre, where waste of fibre is used.
6.7 Now coming to the question whether waste of polyester fibre could be considered as polyester fibre, we looked into the question by referring to Fairchild’s Dictionary of textiles.
“Fibre : – “The fundamental unit used in fabrication of textile yarns and fabrics. A unit of matter characterised by having a length at least 1.00 times its diameter or width; fibres that can be spun into a yarn or made into a fabric by interlacing.”
Waste : “Bye products created in the manufacture of fibres, yarn and fabric. Waste is classified broadly as soft or hard waste and specifically by the stage of manufacturing in which it occurs.”
From the above meanings given in the recognised textile dictionary, it would appear to us that polyester fibre cannot be equated with polyester waste.
6.8 We also agree with Shri Puri that their letter dated 6-5-1985 to the J.C.C.I.E. does not anywhere bring out that they are using polyester waste mixed in the fibre.
6.9 Based on evidence discussed earlier, we come to a reasonable conclusion that the material is left over fibre from purchase made from open market after utilising for spinning plus waste. Hence we are to hold that the declaration on the S/Bs that the material is 100% polyester fibre is a mis-declaration attracting penal provision and on that ground liability to confiscation of goods can be justified, because of the specific provision in the export control order, vide order 3(4) to the effect that such misdeclared goods are prohibited goods.
6.10 Another argument pleaded by Shri Lodha that waste is garnetted and it becomes fibre. In this context he refers to Govt. of India decision reported in 1982 (10) E.L.T. 686 (GOI). That decision is in the context of liability to duty in respect of the resultant product, after garnetting waste of fibre. Here we are considering whether fibre and waste can be equated. If they acquire waste and garnet it and use it, that does not make the exempt material fibre. The exempt material would be waste, which they can import duty free, garnet it and use in the beds. Viewed from this angle, their declaration cannot be held to be proper. Further there is no evidence produced before us that waste was garnetted and stuffed as fibre. On the contrary, evidence in the form of examination report, technical opinion of Dy. C.C. show that the material found was having entangled mass of filament yarn indicative of waste. If garnetting had been done, such a situation would not have been noticed, because in the process of garnetting polyester waste, fibre in running length would have been obtained.
7. Now we come to the question whether the order of the Collector directing that the export of goods under these S/Bs shall not be taken into account for fulfilment of export obligation under DEEC scheme is correct. The S/Bs specifically contain declaration that the goods are offered for export towards the export obligation that may be specified in the DEEC licence, which is pending issue. If, on adjudication of this case, it is found that these goods are not as per declaration meriting consideration as goods fulfilling the export obligation, such a direction is a corollary to the finding arrived at. This finding is to be given in the context of the specific declaration made on the S/Bs to that effect. Hence, Shri Lodha’s claim that it is not specifically stated in the SCN does not appeal to us. We also look at this position from a different angle. In this case, the goods were allowed export as per the appellant’s request on furnishing bank guarantee pending adjudication. On adjudication, if the goods are found to be liable to confiscation, the Collector would have ordered confiscation (had the goods not been allowed export) and simultaneously directed the goods to be taken back to town, in which case exports towards fulfilment of export obligation could not be claimed. Since the goods were provisionally allowed export pending adjudication, the Collector on finding the goods to be liable to confiscation on the ground of mis-declaration of the exempt material, can, in the circumstances, pass the order. The reason for giving this direction, in the circumstances, cannot be said to arise merely from the SCN but mainly because of the subsequent request from the appellants for allowing their export against Bank guarantee.
8. On the penalty of 16 lakhs, we find that since the goods have been allowed export against Bank guarantee and the goods are held liable to confiscation, imposition of penalty has become inevitable. But we feel penalty of Rs. 16 lakhs is extremely harsh and is not justified by any standards, for the following reason:
(i) Shri Puri pleads that duty involved on exempt material, when imported, would be of this order. Hence it is justified. We find that Collector has not allowed logging of these S/Bs for export obligation under DEEC scheme which order, we have upheld. Hence no duty benefit would accrue to them and that could not be an acceptable reason for this quantum of penalty.
(ii) From the evidence discussed, we find that the material could be polyester fibre left over mixed with waste. Hence in such case, we cannot rule out use of some percentage of fibre in the export product, for which duty benefit would be available.
(iii) The buyer is satisfied with the quality of the beds supplied indicating that beds are conforming to their requirements.
Having regard to all these considerations, we feel that ends of justice would be met, if penalty is reduced to 6 lakhs (Rs. 2 lakhs for each S/B). Accordingly we reduce the penalty from Rs. 16 lakhs to Rs. 6 lakhs with consequential relief.