KAPADIA, J. - (1.) THESE civil appeals are filed by the Department under Section 130E of Customs Act, 1962 against order passed by CEGAT dated 22.12.2000 in Final Order No.411-421/2000-D in Appeal Nos.C/286/98-D and C/302-311 of 2000-D with E/Co/239, 257-260/2000-D whereby the Tribunal allowed the appeals of the importers herein (respondents).
(2.) THE question of law that arises for determination in these civil appeals is: Whether shoe uppers, outer soles, insoles and sock liners imported by M/s. Phoenix Industries Ltd. (PIND) in the same container could be clubbed so that it could be considered as import of the shoe itself in semi knocked down (SKD) condition? Whether the importer was guilty of mis-declaration when the importer declared SKD goods as components? A synthetic shoe, inter alia, consists of vital parts, namely, synthetic uppers, outer soles, insoles and sock liners M/s. Phoenix International Ltd. (M/s. PIL) were the holders of Quantity Based Advance Licence under which it was entitled to import synthetic shoe uppers, PVC compounds and natural rubber. M/s. PIL imported synthetic shoe uppers numbering 5215 pairs on 16.2.96 declaring CIF value at Rs.19,52,401. On the same day Phoenix Industries Ltd. (M/s. PIND) imported soles and insoles numbering 5151 pairs worth Rs.7,07,806 (CIF). M/s. PIL had imported synthetic uppers under DEEC Scheme whereas soles were imported by M/s. PIND under para 22 of the EXIM Policy 1992-97. Both the companies imported respective items as components/parts. On preliminary enquiry, Department was satisfied that there was an attempt to mislead by importing the above items separately through two different companies as uppers and soles constituted complete synthetic shoes in SKD form. In the preliminary enquiry the Department found that all the cartons were placed in one container with the marking of "Phoenix" without specifying whether the container was meant for M/s. PIL or M/s. PIND. Hence, two show cause notices came to be issued dated 7.5.96 for the period 21.6.95 to 4.11.95 and the second show cause notice dated 1.7.96 for the month of February 1996. In the show cause notices it was alleged that the parts imported in the name of two companies were synthetic shoes of "Reebok" brand in SKD form; that the import orders for synthetic uppers, outer soles and insoles had been placed by the two companies on the same Supplier in Bangkok; that the import orders carried the same number; that, both the import orders were signed by Mr. Bhupinder Nagpal, General Manager of M/s. PIL; that the import invoices filed by the two companies referred to the same invoice (proforma) dated 2.11.95; and that the import orders for synthetic shoe uppers, outer soles and insoles were placed by Mr. Bhupinder Nagpal on behalf of the said two companies. According to the show cause notices consumer items were placed in the negative list vide para 156(A) of the EXIM Policy 1992-97 and under the said para of consumer goods in SKD condition or Ready to assemble condition, were required to be imported under specific import licence; that synthetic shoes constituted a consumer item and, therefore, required specific import licence; that, in the present case goods in SKD condition or Ready to Assemble condition were imported without specific import licence despite knowledge on the part of M/s. PIL that all the components of "Reebok" shoes like synthetic shoe uppers, outer soles, insoles and sock liners were meant to be assembled either by them or in their behalf and later supplied to M/s. Reebok International Ltd. or M/s. Reebok India. In this connection, the Department placed reliance on the manufacturing agreement between M/s. PIL and M/s. Reebok International Ltd. In the show cause notices it was further alleged that M/s. PIL were the owners of M/s. PInD. In the circumstances, the show cause notices stated that M/s. PIL had resorted to the above subterfuge of importing uppers of "Reebok" shoes in their own name and the remaining three components in the name of M/s. PInD in order to bypass restriction imposed by para 156(A) of the EXIM Policy 1992- 97. In that connection, the Department alleged that a loan of Rs.11.7 crores was advanced by M/s. PIL to M/s. PInD, interest free, during the year ending 31.3.95 and a loan of Rs.7.7 crores was also advanced to the same company, interest free, during the financial year 31.3.94. For that purpose reliance was placed on the balance-sheets of M/s. PIL. Under the above circumstances, the Department alleged, vide the show cause notices, that M/s. PIL was the importer of all the components, namely, synthetic shoe uppers, outer soles, insoles and sock liners; that, as per rule 2(a) of the General Rules of Interpretation of the First Schedule to the Customs Tariff Act, 1975 (for short, "General Rules of interpretation") the goods imported were not parts/components but were SKD goods, liable to be assessed as complete finished goods under tariff Heading 6404.19 of the First Schedule of the Customs Act, 1975 and liable to basic customs duty at 50% ad valorem and countervailing duty at 15% ad valorem. Vide two show cause notices violation of para 156(A) of the EXIM Policy 1992-97, was also alleged. In that connection, the Department alleged that M/s. PIL was fully aware that import of the above parts of "Reebok" synthetic shoes in the name of one company may give rise to suspicion and, therefore, the imports were made through the aforestated subterfuge. Further, according to the show cause notices, the value given in their import invoices did not represent the correct transaction value since a single consignment meant for one importer, namely, M/s. PIL was deliberately split up into two parts and, accordingly, valuation had to be done by invoking rule 8 of the Customs Valuation (Determination of Price of Imported Goods) Rules, 1988 (for short, "Customs Valuation Rules"). In this connection, the case of the Department was that there were no imports of "Reebok" components in India by any other company and, therefore, value of comparable goods was not available and, therefore, the Department had no option but to invoke rule 8 of the Customs Valuation Rules. Accordingly, the CIF value was claimed at Rs.1,566.39 per pair under rule 8 of the Customs Valuation Rules. In the circumstances, vide the show cause notices the importer was called upon to answer why the benefit of Notification No.45/94-Cus dated 1.3.94 should not be disallowed; why consignments of the two companies should not be clubbed for purposes of assessment under EXIM Policy 1992-97 and Customs Act, 1962; why CIF value of shoes should not be taken at Rs.1566.39 per pair; why synthetic shoe uppers, outer soles, insoles and sock liners be not valued at Rs.82,25,114(CIF); why the said items should not be confiscated under Section 111(d)(l)(m) of the Customs Act, 1962; why the aforestated four items should not be assessed to duty under tariff Heading 6404.19 of Schedule I to Customs Tariff Act, 1975 as synthetic shoes in SKD form liable to basic customs duty at 50% plus CVD at 15% ad valorem; why benefit under DEEC should not be denied and lastly why penalty under Section 112(A) of Customs Act, 1962 should not be imposed for contravention.
(3.) IN reply to the show cause notices, it was stated, that the aforestated two companies were separate independent companies; that M/s. PIND was incorporated as private limited company in 1992 in the name of M/s. Welcome Leather INdustries Pvt. Ltd.; that M/s. PIL was incorporated as a private limited company in 1987; that M/s. PIL could not begin its commercial activities for four years and it started its business in 1991 as merchant exporter; that in 1991 M/s. Welcome Leather INdustries Pvt. Ltd. decided to sell the company which was acquired by M/s. PIL; that in 1992 M/s. PIL started manufacturing shoe uppers and, therefore, though both the companies, namely, M/s. PIL and M/s. PIND were under the same management having common majority of directors and shareholders, they were separate independent companies in all respects. According to the reply, the two companies were separately assessed under INcome Tax Act, Sales Tax Act and Central Excise Duty. The factories of the two companies were located at different places. About 500 employees were working in respective companies. According to the reply filed before the Commissioner, M/s. PIND was engaged in the manufacture of leather shoes, synthetic shoes, semi-leather shoes, outer soles etc. M/s. PIND were registered as a leather industry. According to the reply, goods manufactured by M/s. PIND including footwear were sold in the domestic market. According to the reply, in certain cases footwear was got manufactured by M/s. PIL on job work basis. According to the reply, in some cases M/s. PIND acted as job workers for M/s. PIL. At the same time, in other cases, M/s. PIL were as job workers for M/s. PIND. According to the reply, M/s. PIL handled, during the above period, overseas sales whereas domestic sales were done by M/s. PIND under the authorization of M/s. PIL. As regards the import in question, it was stated that 5251 pairs of outer soles, insoles and sock liners were imported by M/s. PIND from the foreign Supplier in Bangkok. The importer denied that M/s. PIND was a dummy unit of M/s. PIL as alleged by the Department. IN reply, M/s. PIND objected to the clubbing of imports as is claimed in the show cause notices. IN reply, it was stated that M/s. PIND was 100% fully owned subsidiary of M/s. PIL and, therefore, it was not a dummy company as alleged by the Department. IN the alternative, it was submitted that even for the sake of argument imports of two companies were clubbed, yet there was no violation of Foreign Trade (Development and Regulation) Act, 1992. IN reply, M/s. PIND stated that the concept of "SKD" did not exist in respect of synthetic shoes; that, in respect of shoes it was not possible to unassemble the product into parts and, therefore, para 156(A) of the EXIM Policy 1992-97 had no application to the facts of the present case. IN this connection, it was further stated that in making of shoes a complicated industrial process involving costly machine, workers, technical knowhow etc. was involved and that the finished goods cannot be manufactured without further processing and, therefore, it is a misnomer to call synthetic shoe uppers, soles, insoles and sock liners as SKD packs of complete shoes. Reliance was placed also in para 7(12) read with 156(A) of the EXIM Policy 1992-97 in respect of the contention that "consumer goods" has been defined in para 7(12) refers to goods like ceiling fans, cycles etc.; that para 7(12) refers to "consumer goods" which can directly satisfy human needs without further processing and since synthetic shoes were not capable of being assembled without further processing they did not attract para 156(A) of the EXIM Policy 1992-97. On the question of applicability of rule 2(a) of the General Rules of interpretation, the importer stated that the said rule was meant only for classification of goods under the Schedule to the Customs Tariff Act, 1975; that, the said rule cannot be used for interpretation of EXIM Policy 1992-97 or the exemption notification No.45/94-Cus dated 1.3.1994 and, therefore, the importer disputed the contention of the Department that because of rule 2(a) of the General Rules of the INterpretation the items imported should be construed as SKD packs of sports shoes, therefore, according to the importer rule 2(a) was not applicable. Further, according to the importer, Notification No.45/94-Cus dated 1.3.1994 gave exemption to the items mentioned in Table A annexed thereto which referred to sole, insole and sock liner and consequently M/s. PIND was entitled to the benefit of the said notification. IN this connection, it was stated that goods falling under Table A were not governed by Actual User condition. According to the importer the said notification was applicable to the aforestated four items which were used in the leather industry. According to the importer, so long as the aforestated items, namely, outer soles, insoles and sock liners were imported as "parts" by M/s. PIND, exemption under the above notification was applicable. On the question of valuation it was stated that the foreign Supplier in Bangkok was unrelated to M/s. PIL and M/s. PIND; that Reebok INternational Ltd. had no shares in the foreign Supplier company; that the said foreign Supplier was not the sole Supplier of Reebok INternational Ltd. and, therefore, the transaction value of the aforestated four parts should be accepted in terms of rule 4 of the Customs Valuation Rules. Therefore, it was not open to the Department to invoke rule 8 of the Customs Valuation Rules. Accordingly, it was prayed by the importer that the show cause notices be dropped. The reply of M/s. PIL and the reply of M/s. PIND are almost identical. By order dated 12.4.99, the Commissioner held that the imports made by M/s. PIND of soles, insoles and sock liners should be treated as imports by M/s. PIL, however, in view of the elaborate manufacturing process undertaken in the factory to produce a complete footwear it was not possible to hold that complete footwear in SKD condition or Ready to Assemble condition was imported so as to contravene para 156(A) of the EXIM Policy 1992-97; at the same time, the Commissioner held that since the four items had to be clubbed and since the entire operations were undertaken by M/s. PIL and since the four items were essential components of synthetic shoes, rule 2(a) of General Rules of Interpretation stood attract. The Commissioner took the view, in this connection, that rule 2(a) provides for a legal fiction to be applied to the imported goods. It provides for the rate of duty applicable to components to be applied as if the components were finished articles. That, since the imports were of items which were essential parts of synthetic shoes the said imports were imports of synthetic shoes in an unassembled form. Hence, it was held that all imports attracted duty in the present case at the rate applicable to the footwear and not at the rate applicable to components/parts. Accordingly, the Commissioner held that no duty was demandable in respect of synthetic uppers, imported by M/s. PIL during the period 21.6.1995 to 4.11.1995. However, for imports of soles, insoles and sock liners made by M/s. PIND, exemption under notification 45/94-Cus dated 1.3.94 was not admissible and consequently all the three components imported by M/s. PIND would attract duty at the rate applicable to fully-finished footwear under tariff Heading 64.04. That, there was no exemption for footwear under the said notification as it was available only to parts of footwear. That, since all the components imported by M/s. PIND attracted duty at the rate applicable to fully- finished footwear, the said exemption notification 45/94-Cus dated 1.3.94 was not applicable to the facts of this case.;