The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Mumbai, has set aside the recovery of ₹1.32 crore in customs duty, confiscation of imported road-construction machinery and consequential penalties after holding that cancellation of the project for which the machinery was imported did not automatically extinguish the importer’s exemption entitlement.

The bench of Ajay Sharma (Judicial Member) and C.J. Mathew (Technical Member) observed that the customs authorities had prematurely seized the machinery without establishing that it had been diverted to an ineligible project or used for any prohibited activity. It held that the seizure itself prevented the importer from complying with the post-importation conditions attached to the exemption notification.

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The dispute concerned the import of a “slipform paver finisher for laying concrete pavement, Model S600,” valued at ₹5.55 crore.

The importer had successfully bid for a project awarded by the Public Works Department of the Government of Chhattisgarh on June 24, 2010. The project involved providing two-lane concrete pavement, widening culverts and constructing new slab culverts on a 77.80-kilometre stretch of National Highway 21.

A Bill of Entry was filed on December 22, 2010, claiming concessional customs duty under Serial No. 230 of Notification No. 21/2002-Customs dated March 1, 2002. The machinery was assessed and cleared by the Jawaharlal Nehru Customs House at Nhava Sheva after allowing the exemption.

The machinery was subsequently kept at the importer’s Mumbai premises while awaiting clearance for commencement of the road project.

According to the importer, work at the intended project site could not commence because of civil disturbances attributed to Maoist activity in the area.

The underlying contract was later terminated on July 8, 2011, and dispute-resolution proceedings were initiated under the terms of the contract. Before the controversy over the terminated contract could be resolved, customs authorities seized the imported machinery on October 4, 2011.

The department issued a show-cause notice on March 30, 2012, alleging breach of the conditions attached to the exemption notification because the machinery had not been deployed in the project for which it was imported.

The Commissioner of Customs consequently denied the exemption and ordered recovery of the entire duty foregone, amounting to ₹1,32,73,596, along with applicable interest. The machinery was also confiscated under Section 111(o) of the Customs Act, 1962, with an option to redeem it on payment of a fine of ₹55 lakh.

A penalty under Section 114A was imposed on the importer. Separate penalties of ₹10 lakh each were also imposed on Gulshan Chopra under Sections 112 and 114AA of the Customs Act.

Dr. Sujay Kantawala, the counsel on behalf of the importer contended that all the conditions governing eligibility at the time of import had been fulfilled. Its inability to deploy the machinery in the original project arose from circumstances beyond its control, including disturbances at the project site and the subsequent termination of the contract.

It was argued that the machinery had not been diverted to any other project or used for an ineligible purpose. The mere fact that it remained unused could not be equated with a violation warranting recovery of the duty concession.

The importer also sought the benefit of depreciation if any duty liability was ultimately found payable.

The Customs Department, on the other hand, questioned the genuineness of the importer’s entitlement. It argued that the project was allegedly intended to be executed through another entity and claimed that the explanation regarding the impossibility of executing the contract was an “eyewash.”

The department also submitted that depreciation could not be allowed without the necessary certification from the concerned project authority.

The Tribunal explained that the exemption scheme contemplated two separate stages of compliance.

The first was “threshold eligibility” at the time of import. An importer qualified at this stage by holding the required contract with a designated government department, authority or instrumentality and by importing the specified machinery.

The second was “continuing eligibility,” which governed possession and permissible use of the machinery during the lock-in period prescribed by the notification.

According to the Bench, a subsequent breakdown or termination of the underlying contractual arrangement could not retrospectively destroy an exemption that had been validly obtained at the time of import.

The Tribunal found that the contract awarded to the importer had not been declared void. Nor had the competent authority’s certification that the work had been awarded to the importer been successfully questioned in the adjudication order.

“The threshold eligibility is, thus, beyond controverting,” the Tribunal observed.

The Bench accepted that the machinery had not been used in the project for which it was originally imported. It nevertheless held that non-use, by itself, did not establish a breach of the exemption notification.

The notification prohibited the machinery from being used for an ineligible activity during the lock-in period. In the present case, there was no evidence that the machinery had been deployed in any other project, much less an ineligible project.

The Tribunal held that the customs authorities had mistakenly treated cancellation of the original contract as an event that automatically terminated the exemption.

“The hasty conclusion that contract cancellation did trigger the foreclosure of entitlement under the notification is not supported by the terms and conditions of the notification,” the Bench stated.

It further noted that the exemption was introduced to facilitate investment in machinery required for road-infrastructure development. Such capital goods may ordinarily be used across different eligible road projects, provided the restrictions contained in the notification are respected.

The Tribunal also disapproved of the adjudicating authority’s extensive reliance on suspicions concerning the importer’s intentions and commercial conduct.

It observed that a taxing statute is primarily concerned with the imported goods, their eligibility for exemption and compliance with the relevant statutory conditions. Events preceding import or arising after clearance would be relevant only to the extent that they demonstrated a violation of the applicable import conditions.

The Bench remarked that the adjudication order had ventured into the “character and behaviour of the importer” without connecting those allegations to an actual breach of the notification.

It held that such narration amounted to “proverbial straw clutching,” which neither strengthened the adjudication process nor promoted the credibility of the order.

The machinery was required to remain subject to the exemption conditions until December 2015. However, it was seized by customs authorities in October 2011, barely a year into the prescribed lock-in period.

The Tribunal held that this premature intervention prevented the importer from using the machinery even for purposes that might otherwise have been permissible under the notification and its subsequent amendments.

Since the department took control of the machinery without establishing diversion or prohibited use, the period during which the goods remained unusable because of the seizure could not be counted against the importer.

The Bench consequently directed that the entire inoperative lock-in period beginning from the date of seizure should be excluded while administering the exemption notification.

CESTAT set aside the recovery of customs duty, confiscation of the machinery and all consequential penalties. The underlying show-cause notice was also set aside.

The Tribunal ordered restoration of the machinery to the importer so that it could comply with the applicable post-importation conditions.

It further granted the importer liberty to approach the jurisdictional customs authorities for termination of the deferred exemption arrangement if compliance had become impossible because of changes in the Central Government’s scheme or other subsequent circumstances.

If the importer opts to terminate the arrangement and discharge the applicable liability, its entitlement to depreciation must be independently determined by the proper officer empowered to assess the duty, the Tribunal clarified.

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