The Hindu Business Line : Is there a perpetual liability to pay Customs duty?

THERE are Notifications issued under the Customs Act which provide for duty exemption subject to fulfilment of post-importation conditions. Several such notifications provide for execution of a bond or undertaking by the importers to the effect that they will comply with the conditions. Some notifications do not have any such clause. In such cases, if an importer does not comply with post-importation conditions what happens? Can Customs duty be recovered? Up to what point of time can notices for recovery be issued? Is Section 28 of the Customs Act applicable in such cases? These questions were referred to a Larger Bench of the Customs and Excise Appellate Tribunal and in terms of its decision in the Bombay Hospital Trust vs Commissioner of Customs, Sahar, Mumbai, the Larger Bench of the Customs Tribunal, Mumbai, answered these references. The answers provided are sweeping.

The issues relate to a case where post-importation conditions with regard to free treatment of certain percentage of patients were not complied with as stipulated in the Customs Notification granting duty exemption for medical equipment. In this case (Lady Amphthil Nurses Institutions vs Commissioner of Customs, Chennai — 150 ELT 776), the Tribunal held that Section 28 will not apply for recovery of duty in such cases and further that the time limit will start from the date the show-cause notice is issued for recovery of duty. But later, reconsideration of this decision was sought from the larger Bench on the following two grounds:

a) The decision does not indicate under what provision duty can be demanded in the absence of any specific provision.

b) It also does not indicate as to the basis for the view that period of limitation will commence from the date of issue of notice for recovery of Customs duty.

While answering these questions, in the Bombay Hospital Trust case, the Tribunal held that: a) when post-importation condition is not fulfilled, the Customs has power to recover the duty in terms of Section 12 of the Customs Act; b) paragraph 12 of the Supreme Court's decision in the Mediwell Hospital and Health Care Pvt. Ltd (89 ELT 425) case provides an authority for such recovery; and c) the notices issued demanding such duties are not subject to any limitation of time.

While coming to this conclusion, apart from the Mediwell Hospital decision, the Tribunal relied on the Supreme Court decision in Commissioner of Customs, Mumbai vs Virgo Steels (141 ELT 598). How far do these decisions of the apex court lend support to the conclusions drawn by the Tribunal?

Section 12(1), which the Tribunal has referred to as providing power to recover escaped Customs duty, reads thus: "Except as otherwise provided in this Act, or any other law for the time being in force, duties of Customs shall be levied at such rates as may be specified under [the Customs Tariff Act, 1975 (51 of 1975)], or any other law for the time being in force, on goods imported into, or exported from, India."

In the Virgo Steel case, the Supreme Court held that the power to recover duty which escaped collection is a concomitant power arising out of levy of Customs duty under Section 12 and that the same does not emanate from Section 28. The Tribunal quoted the observation of the court only to this extent. However, the court's further observations and in what context they were made throw more light on the issue. The court observed that Section 28 provides for the procedural aspect for recovery of duty and, hence, any irregularity committed by a proper officer in following the procedure laid down in the section would not take away the jurisdiction to initiate recovery of escaped duty, but it may make such proceedings voidable.

In Virgo Steel, the argument advanced by the company was that no valid notice was issued under Section 28 by the Department to recover the duty. This position was taken by the company in spite of a letter written by it on its own volition accepting duty liability and also informing the Department that it was ready to pay the duty chargeable on the goods without any show-cause notice and personal hearing in the matter.

Taking this into account, the Supreme Court concluded that when specifically the company has waived its right for a notice, it cannot take a stand now that proceedings initiated against it are void for want of a notice under Section 28. Thus, nowhere in the Virgo Steel case did the Supreme Court hold that Section 12 alone would be sufficient to recover escaped duty without any reference to Section 28.

Second, the Tribunal has placed reliance on the Supreme Court decision in the Mediwell Hospital case. In paragraph 12 of the this decision, the court observed that the very notification granting exemption should be construed as casting a continuing obligation on the part of the importers to give free treatment as envisaged. Therefore, the court observed that the competent authority should continue to be vigilant and check whether undertakings given by the importers are being duly complied with and further that if they find that the said obligations have not been discharged, they can enforce realisation of the Customs duty from them. These observations have been taken as providing an authority for recovery of duty.

In paragraph 12 of the judgment in the Mediwell Hospital case, it is true that the Supreme Court has observed that if the importers fail to carry out the obligations cast on them, then the competent authorities can enforce realisation of Customs duty from them. The court has referred to the liability on the part of the importers to pay duty in such cases. But nowhere in this portion of the judgment there is reference to the procedure or provisions to be adopted for realisation of Customs duty in such a situation. The Customs Act is a self-contained legislation providing authority as well as procedure for levy and recovery of Customs duties. Hence, can it be concluded that paragraph 12 of the Supreme Court decision in the Mediwell Hospital case constitutes an authority to order recovery independent of statutory provisions?

In this context, it will be of interest to note the Supreme Court's observations with regard to interpretation of judgments. In the Escorts Ltd vs Commissioner of Central Excise, Delhi-II (173 ELT 113) case, the Supreme Court held: "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. Observations of courts are neither to be read as Euclid's theorems nor as provisions of the statute and that too taken out of their context. These observations must be read in the context in which they appear to have been stated. Judgments of courts are not be construed as statutes... Judges interpret statutes, they do not interpret judgments. They interpret words of statutes; their words are not to be interpreted as statutes."

Therefore, the two decisions of the Supreme Court relied upon by the Tribunal do not appear to justify the conclusion drawn by it. As early as in 2000, when this issue appeared to be unclear to the Customs authorities, reference was made to the Law Ministry, which opined that with regard to post-importation conditions, which are of continuing nature, everyday of breach starts a new limitation for the purpose of Section 28 and, accordingly, the limitation for violation of post-import obligations will start from the last day of violation preceding initiation of proceedings.

In the same breadth, the Ministry also opined that Section 28 appears to deal with cases where duty was not levied or short-levied at the point of import and does not appear to cover cases where duty becomes payable at a later date because of violation of post-importation conditions (CBEC Circular 73/2000 dated September 1, 2000).

This opinion appears to be self-contradictory in that it states at one place that provisions of Section 28 will not apply for demand of duty for post-importation violation and at another place states that every day's breach will start a new limitation for the purpose of Section 28.

However, the apex court decision in the Jagadish Cancer and Research Centre vs Commissioner of Customs, Mumbai (132 ELT 257) case clarifies the legal position. This case also deals with a similar situation where the medical equipment originally allowed duty free were ordered to be confiscated by Customs for non-compliance with the conditions of the notification.

Besides confiscating the goods, the Commissioner also demanded Customs duty in terms of Section 125(2). When the Cancer Centre challenged the demand of duty, the apex court observed that this case will not attract Section 28(1) which covers cases of duty not levied or short-levied and that the order for payment of duty under Section 125(2) would be an integral part of proceedings relating to confiscation, as the importer had violated the conditions of notification subject to which duty exemption was granted.

In terms of Section 111(o) of Customs Act, any goods exempted subject to any condition from duty and in respect of which the condition is not observed will be liable for confiscation and Section 125(2) provides for option to the importer to get the goods released in lieu of such confiscation and when such option is exercised duty on the goods also has to be paid.

Thus, in a situation where post-importation conditions are violated, there is an inbuilt provision under Sections 111(o) and 125(2) to confiscate the goods and also demand duty on the same. However, if the option to redeem the goods is not exercised, the importer may refuse to pay the duty. On the other hand, the Karnataka High Court, in the Medical Relief Society (111 ELT 327) case, observed that failure to discharge the post-importation conditions will expose the goods imported to confiscation besides the liability to pay duty and that proceedings for recovery of such duty does not fall foul of Section 28.

Thus, it appears that Sections 28, 111(o) and 125(2) can be pressed into service in a harmonious manner, depending upon the facts of each case, within the timeframes stipulated in these Sections. But still a few questions remain unanswered. If the equipment becomes obsolete and is no more put to use or is to be scrapped what will be the consequences? The law as it stands does not say anything on this.

Article 265 of the Constitution proclaims that no tax shall be levied or collected except by authority of law. Levy or recovery proceedings can only be in terms of a procedure known to law. In the Mediwell Hospital case itself, one direction given by the Supreme Court related to instructions to the hospitals to advertise in local newspapers to ensure that they are able to get patients for providing free treatment as required.

This direction was challenged before the Supreme Court in the Sathya Sai Institute of Higher Medical Sciences (158 ELT 675) case on the ground that such conditions were not imposed in the relevant notification. The three-member Bench of the Supreme Court, therefore, held in this case that grant of exemption is "a prerogative of the government and, hence, it is for the government to impose appropriate conditions and the Supreme Court need not interpose further conditions." Consequently, this part of the decision in the Mediwell Hospital case was overruled.

It is settled law that courts and Tribunals cannot take the role of legislatures and fill in the gaps in the statutes. It appears that the larger Bench decision in the Bombay Hospital Trust case has thrown open more questions than it has answered.

(The author is a Chennai-based advocate.)

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