The Customs, Excise and Service Tax Appellate Tribunal (CESTAT), Bangalore, has held that importers cannot claim a refund of Special Additional Duty (SAD) under Notification No. 102/2007-Customs when imported medical gloves undergo sterilisation, repacking and relabelling amounting to manufacture before their domestic sale.
The bench of R. Bhagya Devi (Technical Member) dismissed 26 appeals upholding orders that had either rejected SAD refund claims or demanded recovery of amounts previously refunded.
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The bench found that the importers had undertaken manufacturing processes and cleared the gloves on payment of central excise duty. They therefore could not claim that the imported goods had merely been resold for the purposes of the refund notification. Kanam Latex Industries
The appeals arose from orders passed by the Commissioner of Customs (Appeals), Cochin. Of the 26 appeals, 15 were filed by Kanam Latex Industries, four by Kurian Abraham and seven by Sterimed.
The appellants imported non-sterile medical latex examination gloves in bulk. After import, the gloves were taken to their factories, sterilised, repacked into retail packs and relabelled. The domestic sale invoices described the goods as sterilised surgical medical examination gloves in pairs.
The importers paid central excise duty at a concessional rate under Notification No. 1/2011-Central Excise dated March 1, 2011, without availing CENVAT credit on inputs or input services. They also sought refunds of SAD paid at the time of import under Notification No. 102/2007-Customs dated September 14, 2007.
The customs authorities denied the benefit on the ground that the imported goods had undergone manufacture before sale and that the notification’s conditions had therefore not been satisfied.
The appellants contended that sterilisation and repacking did not produce a new commodity with a distinct name, character or use. According to them, the goods remained medical gloves throughout, and conversion from bulk packaging into retail packs did not alter their essential identity or classification.
They argued that Notification No. 102/2007-Customs did not expressly require imported goods to be sold “as such”. In their submission, subsequent sale of the goods on payment of VAT was sufficient to qualify for the refund.
The appellants further maintained that the concept of deemed manufacture under central excise law was a legal fiction that should not be used to deny an exemption under customs law. They relied on decisions concerning imported timber that was cut into smaller sizes before sale, as well as an earlier Chennai tribunal decision in their own cases.
They also submitted that their chartered accountants or statutory auditors had certified that the incidence of SAD had not been passed on to customers and that the refund amounts were recorded as receivables in their books.
The department argued that the refund notification applied to the resale of imported goods and did not extend to goods sold after manufacture.
It emphasised that the appellants had sterilised, repacked and relabelled the imported gloves and subsequently cleared them as sterilised gloves in pairs. These processes amounted to manufacture under the applicable central excise provisions.
The department also relied on the appellants’ payment of central excise duty under the concessional notification as evidence that the goods had undergone manufacture. It pointed out that the earlier Chennai tribunal order relied upon by the appellants had been set aside by the Madras High Court.
Examining Notification No. 102/2007-Customs, the tribunal noted that its conditions repeatedly refer to the sale of the imported goods themselves.
The notification requires an importer to pay the applicable duties at import, make the prescribed endorsement on sale invoices, pay appropriate sales tax or VAT on the subsequent sale, and furnish documents establishing duty payment, sale and payment of the relevant domestic tax.
The tribunal held that these requirements, read together, contemplate the sale of the goods that were imported without an intervening process amounting to manufacture.
It rejected the argument that the absence of the express words “as such” permitted a refund even after manufacturing processes had been undertaken. In the facts before it, the continued identity of the goods as gloves did not establish eligibility for the exemption.
The tribunal relied on the Supreme Court’s decisions in Collector of Central Excise v. S.D. Fine Chemicals Pvt. Ltd., Commissioner of Customs and Central Excise v. Phil Corporation Ltd. and O.K. Play (India) Ltd. v. Commissioner of Central Excise.
Drawing from those decisions, it explained that the statutory definition of manufacture extends beyond the ordinary understanding of producing a new commodity. Processes expressly brought within the definition can attract central excise duty even where the original product does not lose its identity.
Applying that principle, the tribunal held that sterilisation, repacking and relabelling of the gloves amounted to manufacture under the applicable central excise provisions. The appellants’ argument that no distinct product had emerged consequently did not overcome the statutory treatment of those activities.
The tribunal also examined the excise notifications reproduced in its order. It noted that the appellants had a choice between paying duty at 5% with credit or paying the concessional 1% rate without credit, under the scheme discussed in the judgment.
Having cleared the processed goods on payment of concessional central excise duty, the appellants could not support their SAD refund claims merely by arguing that the goods’ identity remained unchanged.
The tribunal distinguished the decisions cited by the appellants on the basis that those cases did not involve the discharge of central excise duty on imported goods after processes amounting to manufacture.
The tribunal specifically distinguished the Variety Lumbers decision. In that case, sawing imported timber logs into different sizes and lengths had not been shown to amount to manufacture. The glove imports involved a different factual position, including processes treated as manufacture and actual payment of central excise duty.
It also rejected reliance on the Chennai tribunal’s March 16, 2018 order in the appellants’ own cases because that order had been set aside by the Madras High Court on April 29, 2021.
The High Court had remanded the matter to the Commissioner of Customs, Tuticorin, for fresh consideration after giving the assessees an opportunity to be heard. It had left the substantial questions of law open. The earlier tribunal ruling therefore could no longer serve as a subsisting precedent supporting the appellants’ claims.
The Bangalore bench additionally relied on Proflex Systems v. Commissioner of Customs and the Hyderabad tribunal’s decision in Olam Agro India Pvt. Ltd., which addressed the requirement that the goods sold must be the imported goods covered by the refund notification.
The tribunal concluded that the appellants had failed to satisfy the conditions of Notification No. 102/2007-Customs because the imported gloves were sterilised, repacked and relabelled through processes amounting to manufacture before sale.
It sustained the impugned orders and dismissed all 26 appeals. The ruling makes clear that, in these circumstances, payment of VAT on domestic sales and non-availment of CENVAT credit did not independently entitle the importers to SAD refunds.
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